2023-06-30 10:28:16 ET
Summary
- Luminar Technologies' growth narrative is overshadowed by its persistent lack of profitability.
- The company's unprofitable business model raises concerns, with losses reported at the gross margin level.
- High expectations for Luminar's revenue growth rates in 2024 may leave little room for positive surprises.
- With significant cash burn and limited cash reserves, Luminar faces the possibility of slowing down expansion or diluting shareholders to raise capital.
Investment Thesis
Luminar Technologies (LAZR) is growing at breakneck speed and has a very compelling narrative to go with its growth rates.
The problem, I argue, has less to do with its narrative, and more to do with its unrelenting unprofitable business. In fact, in its quest to reach non-GAAP positive gross margins by Q4 of this year, Luminar has even requested that its vendors get paid with stock, so that its cost of goods sold can be added back to its non-GAAP gross margins.
Presently, I struggle to get bullish on this stock, so I'm watching from the sidelines.
Why Luminar Technologies? Why Now?
Luminar Technologies is a company specializing in autonomous vehicle technology and advanced sensor systems. They develop lidar (light detection and ranging) sensors, which allow autonomous vehicles to understand their surroundings, with a key focus on vehicle safety.
Luminar has a very alluring narrative that oozes of a growth opportunity. Here I highlight one recent quote from its highly quotable earnings call ,
[...] When we were both at the Shanghai Auto Show recently, I think it was clearer than ever that China has incredibly strong demand for this kind of product to be able to enable the next-generation safety and autonomy and it's about on the order of half of the 20 million vehicles sold per year in China are from global automakers, so many of which that we're working with is limit our partners, so for context of the now more than 20 production vehicle models Luminar is designed into, the majority are also slated for the China market.
Luminar has an impressive narrative, which is supported by very rapid revenue growth rates, that we discuss in more detail next.
Revenue Growth Rates Are the Bull Case Here
Anyone that follows Luminar will know that the business is guiding for a +100% CAGR this year. Indeed, I don't believe that this aspect is up for much contention, and in actuality, I don't have much to add.
Now, what I will immediately point to is the most obvious question, what do Luminar's growth rates look like in 2024?
After all, we are already halfway through 2023, and the market is always looking six months ahead. Meaning that this insight is already more than factored into its narrative.
Essentially, the argument that I'm making is how realistic are the sell-side estimates for 2024?
Expectations are incredibly high for Luminar. I'm not saying that Luminar can't deliver triple-digit growth rates in 2024. But if the market is already expecting that in 2024 Luminar will grow its revenues by 200% CAGR , how much room is there left for Luminar to positively surprise investors to the upside?
And this leads me to discuss its valuation.
The Hype Surrounding LAZR is Sky High
As it stands right now, investors are paying approximately 30x forward sales. Meaning that this is not some undiscovered undervalued business. Investors need this business to truly deliver in 2024. What could go wrong?
For one, and I apologize for my plebian comment, the business is reporting losses on every product and service sold. To be clear, I'm not saying that the business is unprofitable, although it is unprofitable.
I'm stating that at the gross margin level, for every $1 of revenues, the business has $1 dollar of gross profit losses. That's not a viable business. This is before management takes their cut and the underlying expenses with scaling the business.
Allow me to provide further context, for Luminar to report $15 million of revenues, it loses $65 million of cash flows from operations. And note, this cash flow figure doesn't include any capex required to grow the business, this is simply the underlying profitability of its business.
So, What's Next?
I believe that one of two things is going to happen with Luminar Technologies in 2024.
Either the business will meaningfully reduce its revenue growth rate ambitions, or the business is going to run out of cash.
What makes me think this? Consider this, Luminar holds $420 million of cash. But it's burning through significant free cash flows each quarter. Case in point, in Q4 2022 it used $80 million, and in Q1 2023 it used $76 million.
In other words, the business is burning on a path to burn $200 million of free cash flow this year.
Given that Luminar holds about $400 million in cash, it will either have to slow down its expansion or dilute shareholders to raise capital. Or perhaps both?
Here's a quote from the earnings call echoing that insight,
In the coming days, consistent with the plan we put in place last year, we will file a supplement to our existing registration shelf to provide Luminar stock to certain strategic vendors, who prefer it instead of cash and expect this to total about 1% of our current shares outstanding.
I ask of the bulls if I gave you a choice between hard cash and shares which one would you prefer? I suppose the answer to this question depends on the risk appetite that day. But as a whole, I can't see that vendors would be truly exuberant to get paid with shares.
The Bottom Line
Luminar Technologies is experiencing rapid growth but faces challenges due to its lack of profitability.
The company aims to achieve positive gross margins by the end of this year, even resorting to paying vendors with stock.
Additionally, the company's high valuation and ongoing losses raise concerns. Further, Luminar reports losses at the gross margin level, indicating an unsustainable business model.
I believe that either Luminar will lower its growth rate ambitions or face a cash shortage in 2024, as it is burning through significant free cash flows. The company holds around $420 million in cash but may need to slow down expansion or dilute shareholders to raise capital.
Overall, I'm skeptical about the future prospects of Luminar Technologies.
For further details see:
Luminar: Car Crash In The Making