2023-08-11 03:36:42 ET
Summary
- Luminar reported $123M in negative equity but ended the second quarter with $365M in cash.
- The company faces challenges including the level of demand, gross margin, operational expenses, lack of cash resources, and operating in China.
- Luminar needs to sell over 500K sensors by 2025 to break even, but reaching this volume and achieving the predicted gross margins will be a challenge.
Introduction
In March, I wrote about Luminar's ( LAZR ) journey to profitability. I saw difficult times ahead. Now, after the second quarter, the company remains commanding a high valuation despite $123M in negative equity.
The company reported ending with $365M in cash. Overall, for the first half of the year, Luminar spent around $138M. CFO Thomas Fennimore said the company would end up with $300M of cash by the end of the year, leaving room to spend $65M for the next two quarters. In the first half, $39M was added from a $29M equity sale and $10M from a direct offering to partner TPK. An additional $10M is coming from the same place for Q3. Selling equity will likely continue to help with this objective.
Luminar has become the most advanced Western company in the consumer-auto ADAS via its relationship with Volvo (VLVLY) and Polestar ( PSNY ). Win with Mercedes (MBGAF) and Nissan (NSANY) has confirmed the prominent role the company has established for itself. There is no point in arguing this achievement.
Challenges
However, those successes will require delivery, which will be complicated. The challenges will be on many fronts, but five seem to be the most important, in my view. One of them will be the level of demand necessary for success. The second will be the actual gross margin. Third is the operational expenses to run the organization with a history of high spending. The third is a lack of cash resources for the next two to three years. Fourth, the impact of the financial condition after convertible notes and future equity issues on the current value of shares. And the fifth is operating in China with confrontational policies over lidar security risks and policies while lacking IP protection in the country.
The hypothetical question is how many sensors Luminar needs to sell to break even. To break even, the company would need $637M in revenue to cover $308M in operating expenses in 2022 at the 60% gross margin. On non-GAAP calculation, the regeneration of $208M of cash used in operations in 2022 would require no less than $347M in revenue at 60% gross margin.
$347M at $1000 per sensor would require no less than 347,000 sensors. Let's assume Volvo and Polestar will sell combined 200K cars with lidar by 2025. The company will require a lot more customer lidar installations beyond current models. Is this possible? Yes, but it would come with a challenge like design, which takes time.
Furthermore, in 2025, the company indicated that the gross margin will still be at 35%. So to cover the $208M cash spent to break even, the company would need no less than $595M in revenue and 595K sensors sold. That is a lot of sensors.
It is a challenging number to reach what is described as an expectation for the 2025 financial year.
The company needs to deliver a demand of what appears to be well over 500K sensors by 2025 to break even for a 35% gross margin. The volume is possible if most models sold by Polestar and Volvo have Iris on. Perhaps Mercedes will join sales by then.
The gross margin is also a challenging objective, especially since, according to the company, it can only become favorable for the first time in the last quarter of this year. The gross margin we see now is not a production margin. It is a combination of limited likely more of a prototype product delivery with NREs. The cost of such units is undoubtedly excessive, and it is not a good way of reflecting on future production metrics. Still, Luminar, even partnered with third-party manufacturers, has no mass production experience.
The realization of the company's projected 65% margins remains uncertain. Hesai ( HSAI ), the China-based lidar manufacturer, envisions a sustainable 35% gross margin over the long term for its auto-ADAS lidars. The company is poised to manufacture upwards of 200,000 sensors in 2024. It is worth noting, however, that Hesai's initial production ramp-up yielded a mere 5% margin. This figure gradually ascended from 9% to 13% by Q4 2022, when the company scaled its production to 10,000 units per month.
In its strategic approach, Luminar intends to bundle various components of its business, such as software and insurance, alongside hardware sales. Nevertheless, achieving a gross margin of 65% presents a formidable challenge.
Third, can Luminar operate with less than $200M per year in cash spent?
There is no easy way to answer. Manufacturing efficiency can help with gross margin and profit, but operational expenses increase. R&D will not stop. Luminar must reinvent and improve its product to stay in business. The same can be said about the software. The safe bet is that OPEX will go up, not drop.
I believe the company's cash reserves will likely be depleted by the conclusion of 2024, necessitating fresh financing. Currently, the company carries an outstanding convertible debt exceeding $600M, which is earmarked for eventual conversion into shares.
Although the share price appears low, the overall market capitalization indicates otherwise. With projected revenues of $505M in 2025 and a current $2.3B market cap, the capitalization-to-sales ratio stands close to five times. By 2026, convertible notes and equity offerings could increase Luminar's market worth to $3.5B, resulting in a ratio of 7 times its revenue at the same price per share as today.
Finally, the company appears to be running on the same tech for half a decade until a new smaller form factor sensor arrives in 2030. Of course, it is hard to predict the outcome, but competition sensors will likely challenge that condition and impede Luminar's future deal-making potential. Perhaps that is the least of the concerns, with competition in the sector not offering much threat today, except in China. I am interested in how Luminar will maneuver conditions of policies over lidar while being a foreign entity providing hardware to operate in that country. China has issued a direction to ban its technology transfer naming lidar. Still, with Hesai pursuing its aspirations and objectives globally, that ban does not seem to have an immediate impact.
A similar climate exists in the US to ban Chinese hardware. Additionally, Senate already passed an amendment considering limiting investment into Chinese enterprises based on the transfer of technology through the provision of service or operational cooperation as part of the Outbound Investment Act . Would this create pressures that impact Luminar's lidar on Volvo and Polestar cars, manufacturers owned by Chinese Geely? How will the facility in China manufacturing Luminar sensors operate under those conditions?
Another concern is operating in China in a market full of competitors, taking on Western technology without regard for IP protection. Loss of intellectual property is happening all the time globally. However, China has a record of undercutting prices from Western companies by copying technology and subsidizing sales by the state to sell for less. That almost always resulted in lost business to Western companies and destroyed steel and solar industries in the US. A concern that could impact Luminar at one point.
Conclusion
In summary, Luminar is a pricey ticket on a lidar journey with many challenges. The company has been the industry's flagship for some time, but that does not make it any easier to tackle those conditions.
It has collected prominent brand name customers and others, offering a lot of visibility to how it manages the business at hand. At the same time, the journey has limited room for error, with many aspects not even being under Luminar's control.
Having pressure to deliver, no room for error, and being fully valued, Luminar is a complex investment choice with many risks. That risk outweighs the potential for value appreciation, in my opinion. I would not recommend buying shares today but continue to monitor from the sidelines with an unchanged hold rating.
For further details see:
Luminar Revisited: Pricey Ticket, Challenging Journey