2023-06-08 08:15:28 ET
Summary
- Luminar stock has gained more than 40% this year since hitting its trough below the $4 mark in January.
- LAZR continues to forge solid growth as it enters SOP on its flagship Iris sensor with upcoming OEM vehicle launches.
- Luminar Technologies has been on an aggressive consolidation spree across the lidar supply chain, which would bolster its longer-term competitive advantage.
- Uncertainties remain on its ability to expand sales sufficiently and durably in the near term to reach economies of scale needed for its profitability goals - a key preference for investors under the increasingly uncertain market climate.
2022 marked an inflection point for Luminar's ( LAZR ) business, transitioning from R&D to "high-volume series production" with Chinese automaker SAIC's RISING AUTO R7 EV. As discussed in our previous coverage, Luminar remains a share gainer as consolidation continues to take place across the lidar supply chain. And the company's explosive growth in the first quarter, driven primarily by high-volume start of productions, alongside a slew of additional acquisitions across the supply chain continues to accommodate its ambitions to expand market share not just within the auto industry but also across adjacent verticals, including aerospace and defense.
Following Luminar's integration of OptoGration , Black Forest Engineering , and Freedom Photonics in recent years - which the company has now amalgamated into "Luminar Semiconductor" - it has proceeded with further consolidation within the industry through the latest acquisition of Seagate's lidar assets , as well as the hiring of engineers from the now shuttered Argo AI's lidar team. The company has also expanded its strategic contract manufacturing model's global footprint through a new partnership with TPK to accommodate burgeoning market opportunities in China and the broader APAC region. It has also deepened its series production partnerships with key OEMs during the quarter, while also diversifying its go-to-market strategy through the introduction of "Luminar Insurance". The company has even catapulted itself further into the latest AI frenzy by partnering with Scale.ai to further optimize its growing data advantage through "Luminar AI Engine". And last but not least, Luminar's latest partnership with Plus also reinforces its efforts in expanding lidar applications beyond passenger vehicles, effectively diversifying its TAM to drive greater long-term growth opportunities.
Taken together, Luminar continues to reinforce the foundation to its longer-term growth story, with every step in its ongoing consolidation strategy being a pragmatic approach that contributes further to the durability of its fundamental prospects and, inadvertently, valuation upside potential.
Lidar's Social Butterfly
From automakers to contract manufacturers and insurance companies, there is almost no corner of the broader lidar and auto supply chain left untouched by Luminar. Whether the development of autonomous mobility is going to pause at ADAS within the foreseeable future due to regulatory and capital constraints in the industry, or eventually expand to full self-driving within our lifetime, Luminar has anchored its role in furthering related advancements by consolidating critical assets and talent across the supply chain through strategic acquisitions, acqui-hires, partnerships:
- Luminar Semiconductor : Following Luminar's acquisition of Black Forest Engineering in 2018, OptoGration in 2021, and Freedom Photonics in 2022, the company has merged the three components into Luminar Semiconductor. Luminar Semiconductor combines the expertise of Black Forest Engineering in the development of "custom signal processing chips", OptoGration's forte in the development of receiver chips and InGaAs photodetector processors used to "convert optical power into an electrical current", and Freedom Photonics' proficiency in the development of core diode laser technologies critical to lidar systems. By combining the three into one Luminar Semiconductor program, Luminar effectively internalizes the design, production and supply of critical components to its lidar systems. Not only is the vertical integration strategy crucial to enabling greater cost control for Luminar and contribute to its long-term ambitions of reducing the bill of materials ("BOM") on its lidar systems from the current $500 to under $100 , but it also shields the company from unpredictable supply chain bottlenecks that often upend the growth roadmap of those across the capital-intensive auto supply chain.
- Acquisition of Seagate's Lidar Program : The acquisition of Seagate's ( STX ) lidar program in January was one of Luminar's most recent consolidation effort in the industry. Seagate has long been a market leader in the provision of consumer storage systems, especially in the pre-cloud era (recall the portable hard-drives used to be crucial for backing up everything from photos to documents), and its foray in data storage and management solutions for the budding autonomous mobility market in recent years has bred the development of its venture into lidar systems. Just about six months prior to Luminar's acquisition of Seagate's lidar program, the latter debuted its flagship sensor - a "1550 nm system capable of dynamic foveation, 120° field of view, 250 m range and 25W power consumption". Seagate also introduced its proprietary "Heat Assisted Magnetic Recording" technology to advance storage capacity of hard disk drives in its lidar system by leveraging "laser diodes mounted on the recording head to locally heat single bits to flip magnetic polarity and assist in the writing process". Seagate's foray in lidar systems in the two to three years prior to the program's sale to Luminar earlier this year is in line with and complementary to some of the performance metrics boasted by Luminar's latest Iris sensor, underscoring further growth synergies and market share consolidation opportunities over the longer-term as the company works on the upcoming launch of its next-generation Iris+ sensors.
- Hiring of ex-Argo AI Lidar engineers : The abrupt shutdown of autonomous mobility technology developer Argo AI last year, despite its attractive roster of backers spanning Ford ( F ) and Volkswagen ( OTCPK:VWAGY / OTCPK:VLKAF / OTCPK:VWAPY ), highlighted the fragility in market's confidence in speculative technologies with materialization timelines - let alone cash flows - that remain furthest out from realization. Yet, Luminar's swift shift in recognizing the shutdown of Argo AI as an opportunity to expand its talent arsenal, again, highlights the lidar maker's ambitions to consolidate its way into leadership within the industry. The ex-Argo engineers will primarily assist Luminar Semiconductor to advance Luminar's "high-performance laser and photodetector roadmap".
- TPK manufacturing partnership : The series production and integration of Luminar's lidar system has been predominantly in Asia - especially given opportunities in the burgeoning Chinese EV market. Recognizing the opportunities ahead in the region, Luminar has expanded its "capital light" contract manufacturing model's global footprint by partnering with TPK, a reputable contract manufacturer in Asia for brands like Apple ( AAPL ) and Tesla ( TSLA ), to bring online a "new dedicated high volume factory" in China by 2025. As part of the partnership, TPK will also be investing up to $20 million into Luminar. The new facility will have an initial annualized manufacturing capacity for 600,000 sensors, and facilitate Luminar's high-volume production of the upcoming Iris+ sensors. The opportunity will be crucial to supporting Luminar's accelerating share gains in the fast-growing Chinese auto market - the majority of production vehicle models in which Luminar's lidar systems are designed into to date, including the Volvo EX90 Excellence and SAIC RISING AUTO R7 , have been designated for the Chinese market.
- Monterrey, Mexico high-volume production facility : Luminar's expanded manufacturing partnership with Celestica ( CLS ) through the construction of a "new highly automated, high-volume manufacturing facility in Monterrey, Mexico" has come online in early April. The facility is currently undergoing validation testing still, and has begun shipping initial volumes of its Iris sensors off the production line to OEM customers for further refinement in "preparation for [SOP] by the end of this year". Luminar anticipates initial production capacity in the "low 6 figures" with further ramp up to 250,000 sensors through mid-decade, and 500,000 sensors once the additional 200,000 square feet extension is complete over the longer-term.
By expanding its foray in the provision of lidar systems through various consolidations and partnerships in the industry, Luminar has effectively bolstered its go-to-market strategy both within and beyond its core passenger vehicle market. And this can be further corroborated by its latest partnership forged with Plus , an autonomous mobility technology developer for commercial vehicle application. Luminar's Iris lidar system has been exclusively selected as part of the partnership to support Plus' "PlusDrive" assisted driving system for application in commercial vehicles like heavy-duty trucks. In exchange, Plus will supply Luminar with its proprietary "AI-based enhanced driver assist software" to further Luminar's opportunities with commercial vehicle manufacturers.
Luminar's Iris lidar is a first-of-its kind, automotive grade sensing solution that enables high-performance, long-range detections. In addition to production consumer vehicles, Iris uniquely meets the stringent performance, robustness, and reliability requirements for class 8 commercial trucks. Ultra long-range visibility is critical for trucking for both safety and comfort, and Luminar's lidar is capable of seeing as far as 600 meters ahead. This represents as much as 20 seconds of visibility ahead at highway speeds to ensure even fully-loaded trucks can smoothly come to a safe stop when required. This provides a step-function improvement for ADAS systems while enabling the necessary foundation for fully autonomous driving.
Source: investors.luminartech.com
And on the front of its core passenger vehicle market, Luminar is also well-positioned to further scale its inflection from R&D to series production through a series of new and extended partnerships, underscoring an effective land-and-expand strategy with its OEM partners:
- Mercedes ( OTCPK:MBGAF / OTCPK:MBGYY ) : Mercedes has been a critical OEM partner to Luminar during the R&D phase of its Iris sensors and complementary software (e.g. Sentinel). In the next phase of the partnership, Mercedes will be integrating Luminar's full-stack lidar system across its "next-generation production vehicle lines by mid-decade", representing a multi-billion-dollar opportunity for the lidar maker as it continues to scale productions. And Luminar's upcoming Iris+ sensor, the successor to the current Iris sensor which will extend the 3D detection range from 250 m to 200 m alongside other performance improvements, has already kicked off its B sample (i.e. fully functional prototype) customer deliveries to Mercedes, a key series production partner for the new system. Luminar is currently on track to proceeding with C sample (i.e. fully functional prototype tailored to series production requirements) deliveries before the end of the year, underscoring a timely go-to-market schedule to facilitate deployment via Mercedes' line-up of next-generation vehicles by 2025.
- Volvo : After collaborating with Volvo for half a decade in the R&D of its lidar systems, Luminar confirmed its Iris sensors will become a standard offering across the automaker's range of EX90 Excellence EVs. The EX90 Excellence EVs will first begin shipping in the Chinese market, and the initial production run has already been sold out, highlighting Luminar's growing opportunities in the region. Luminar's ability to collaborate with Volvo's in-house autonomous mobility software team, Zenseact, is also expected to further its reach into integration opportunities across the automaker's broader vehicle offerings. Specifically, Volvo is expected to overhaul its current line-up and go fully electric by the end of the decade. And as Luminar continues to reduce its BOM to offer more competitive ASPs on its lidar systems, we expect further expansion on its opportunity with Volvo's higher volume mass market offerings and across its adjacent brands, including Polestar.
- Polestar ( PSNY ) : As discussed in our previous coverage , Polestar represents another key OEM partner to Luminar. In addition to the planned debut of Luminar's lidar sensors in its Polestar 3 SUVs that will begin shipping in 2024, the Swedish EV maker plans to extend integration of Iris technology in its upcoming Polestar 5 sedan that will also be launching in 2024. While Luminar's lidar system is not yet a standard in Polestar's line-up, with low initial take-rates estimated at the "mid to high single-digit percentage" range, the opportunity is expected to extrapolate further over the longer-term. This is corroborated by the Swedish EV maker's integration of the technology first in the Polestar 3 and then in the Polestar 5, underscoring again the effectiveness of Luminar's land-and-expand strategy.
And acknowledging that lidar adoption remains in early stages, with prospective car buyers' priority still being affordability without compromising on safety and performance, Luminar has ventured further into adjacent auto services like Luminar Insurance, helped by its partnership with Swiss Re, to further bolster its go-to-market strategy. Specifically, Luminar-equipped passenger vehicles will be eligible for discounts offered through Luminar Insurance in the U.S. beginning 2024. The savings will be primarily driven by Luminar's aim for its technology to increase safety of vehicles and reduce collision claims. The company has partnered with Swiss Re, a global reinsurance firm, to "analyze and quantify the on-road performance and safety improvements of consumer and commercial vehicles equipped with Luminar's lidar and proactive safety technologies".
The objective of this testing is to validate accident prevention capabilities that we expect will substantially reduce insurance claims, which has the opportunity to lead to substantial reduction in cost of insurance for consumers that drive Luminar-equipped vehicles.
Source: investors.luminartech.com
By selling validated safety and reduced total cost of ownership, Luminar Insurance is expected to become a differentiated go-to-market strategy for Luminar's lidar systems by bolstering end-market demand and further solidifying its longer-term growth roadmap.
In addition to supply chain consolidation, OEM partnership expansion, and differentiated go-to-market strategies, the company's Luminar AI Engine program is also expected to further its full-stack turnkey solution and reinforce its appeal as a lidar one-stop-shop for OEM partners. Specifically, Luminar AI Engine aims at furthering the company's AI capabilities to enable "greater accuracy and precision of detection objects, vehicles, pedestrians, and beyond", and bodes favourable with the looming AI era that has gained momentum in recent months with widespread consumer application of generative AI solutions. Recognizing the increasing value of its growing data advantage that will ensue from continued scale of on-road deployments of Luminar lidar sensors, the company has partnered with Scale.ai - a key provider of critical "data infrastructure for [AI] applications" - to accelerate developments pertaining to Luminar AI Engine. Luminar AI Engine is expected to be a key competitive advantage for the company as it allows Luminar to better address auto OEMs' demand for all-in-one ADAS solutions for in-vehicle integration, furthering its existing offering of perception and core sensor software, as well as the Sentinel full-stack lidar system already implemented by customers like Volvo and SAIC.
Implications of Luminar's Comprehensive Go-to-Market Strategy
As discussed in our previous coverage, Luminar's ability to stay agile with its full-stack offerings spanning the Iris and upcoming Iris+ sensors, alongside accompanying software like the all-in-one Sentinel system remains a competitive advantage in serving the burgeoning ADAS market, helping automakers capitalize on immediate growth opportunities while still honing fully autonomous mobility technology's opportunities of the future. And recent consolidation efforts, as well as extended partnerships are expected to further bolster Luminar's grip in the emerging opportunities, expanding its reach across and beyond passenger vehicle use cases, and contributing to scale needed for furthering margin expansion.
Specifically, the company aims for its core business in the provision of passenger vehicle lidar systems to become profitable by next year, with consolidated profitability achieved by mid-decade. In the meantime, Luminar states it is on track towards positive gross margins by the end of the year, as the primary driver of ongoing cost of sales - namely, new facility and product launch expenses - alleviate in the second half of the year and series production at the Mexico plant ramps up. Management's ambitions to grow 2023 revenues by 100% y/y will also be critical in checking off the items in Luminar's roadmap to profitability, and this would rely on furthering its order book to the $1 billion mark. We view the guidance as reasonable and bolstered by Luminar's impressive sales beat at 111.5% y/y growth during the first quarter as it ramps series production with OEM partners like SAIC's RISING AUTO R7, and across the other 20 models in which its lidar system has been designed into - including the upcoming Polestar 3 and Volvo EX90 Excellence - through the year.
Admittedly, investors have grown their craving for profitable growth amid the increasingly uncertain market climate. This means Luminar's ongoing losses will likely weigh further on the stock's performance, which is in line with market's optimism reflected in gains mid-week following the announcement of the company's partnership with Plus that have been rapidly diminished the next day. The stock's performance continue to exhibit a lack of durability and fragile investors' confidence, underscoring execution risks to Luminar's ongoing growth roadmap. Looking ahead, this means consistent progress - including Luminar's ability to move Iris+ from B sample to C Sample before year-end and completing validation testing at its Mexico plan to alleviate launch expenses and facilitate series production ramp up - will continue to be a key focus area for investors banking on gross profitability by year-end and GAAP net income by mid-decade as major near- and longer-term catalyst for the stock.
The expectations for continued near-term volatility in the stock to reflect investors' fragile confidence is in line with its relative valuation to the broader tech peer group. With Luminar currently trading at almost 30x estimated NTM sales, the company's market value exceeds those of its tech peers with a similar near-term growth profile by wide margins. Yet, it remains undervalued when considering valuation multiples based on further out growth prospects. Luminar currently trades at about 10x 2024 sales and 4x 2025 sales despite an average consensus growth estimate of more than 160% over the same period. The multiples merely reflect those of constituents across the broader tech sector that exhibit average growth in the 16% range, underscoring the pent-up value Luminar has yet to unlock as investors wait for further validation to its growth roadmap.
i. Sales Growth vs. P/S Multiple - Technology
Author, with data from Seeking Alpha Author, with data from Seeking Alpha Author, with data from Seeking Alpha
The Bottom Line
Although Luminar has turned a page from being in full R&D phase to an early transition towards series production with Iris and late-stage sample testing with the upcoming Iris+, execution risks remain. The reception for advanced lidar sensors like Iris, which can facilitate up to level 4 autonomy, remains in nascent stages as ADAS features available in the current market today are primarily in the level 2 to level 2+ range. This underscores how Luminar's investments across the supply chain today - albeit critical to securing its longer-term competitive advantage in capturing growth opportunities in an expanded TAM - may not generate meaningful returns within the foreseeable future.
And given ongoing market volatility and investors' distaste for unprofitable growth under mounting macroeconomic uncertainties over the near-term, the Luminar stock faces greater susceptibility to incremental downside risks in tandem with the broader market ahead. While Luminar's ongoing consolidation strategy would bolster its long-term competitive advantage and represent a value accretive factor, the timeline regarding when the pent-up value will reflect in the stock's performance remains an uncertainty that is largely dependent on the durability of Luminar's execution abilities and ensuing fundamental performance. This includes the demonstration of consistency in realizing the initiatives set out in its long-term growth roadmap. In other words, the risk-reward set-up at current levels remains unfavourable in our opinion.
For further details see:
Luminar: A Solid Contender, But In An Uncertain Demand Environment