2023-03-31 16:41:58 ET
Summary
- Luminar Technologies, Inc. has made commercial agreements with the likes of Volvo and Mercedes Benz and is getting ready to start serial production.
- Its order book has grown significantly to $3.4B and may grow by another $1B in 2023.
- I find Luminar’s stock to be way overpriced with all the upside potential already baked in.
- With the risks of technology adoption and a competitive playing field, it is best to stay clear of Luminar Technologies, Inc. stock at the current price.
Huge growth ahead, but path to profitability is tough…
Luminar Technologies, Inc. (LAZR) is about to embark on serial production of its Lidar devices. As presented in the recently held 1st Luminar Day , the company is expecting huge top line growth. Its projections are for 100% annualized growth for the next 5 years. Their order book has grown nicely from $1.3B in 2020 to $3.4B now, and the management is targeting to add another $1B to it by the end of this year.
However, one has to bear in mind that the order book includes estimates of production volumes and price points for Luminar's hardware and software where the customer has not made contractual commitments. Furthermore, automotive development cycles are quite variable and production timelines delays are not uncommon.
Looking out further, Luminar expects its order book to grow to >$5B with 5MM+ vehicles being installed with its sensors by 2030. I find these projections to be way too optimistic given the entire automotive industry is estimated to produce about 155MM vehicles in 2030. This would mean its sensors being installed in 3.2% of all vehicles produced worldwide; an extremely tall order.
Luminar further projects it can achieve 35%-40% operating margins on a non-GAAP basis by FY2030. This equates to GAAP operating margins of 25%-35%. This also seems way too optimistic given the average auto parts industry margins of just over 5% (with R&D being expensed). While it is fathomable that the production costs are going to decrease radically with automated series production in Mexico and Asia, and its opex costs as a % of revenue are going to decline significantly, I do not see them commanding such premium margins in the auto industry (more on this later).
Luminar Day 2023 Presentation
Valuation shows a worthless stock…
As with any young growth company, to value Luminar Technologies, Inc., I had to make assumptions about the viability of its business model, its terminal revenue and operating margins. From a market size perspective, the total worldwide automotive market (passenger and commercial vehicles) is expected to grow to about 155MM units by 2030 at a CAGR of 3.7%. I assumed 20% of these new vehicles would be candidates for advanced driver assistance systems (ADAS) and/or Level 3+ autonomous driving technology. I based this on the recent share of luxury vehicles being in the 15%-18% range of total vehicle sales. I further assumed that Lidar and competing Radar technology will each take half of this market share and each vehicle equipped with Lidar would only require 1 sensor. The market of Lidar is already very competitive with various start-ups as well as established Tier 1 suppliers entering the field. I reckon LAZR would be able to gain 10% of the market share but would be forced to reduce its pricing per unit to around $750. Since Luminar would be targeting alternate markets such as aerospace, defense, and insurance, I assume these would add another 20% to their revenues. With these assumptions, my estimates yield about $1.4B of revenues in FY2030. This translated into a topline growth rate of ~90% for the next 4 years, which is just shy of management expectations of 100%.
With series production in Mexico, Thailand and Asia by 2030, production costs are expected to come down significantly and the company will start turning an operating profit. The average pre-tax R&D adjusted operating margins for auto parts companies is 5.7% while that for general electronics companies is 10.2%. Being primarily an automotive supplier, Luminar Technologies will ultimately be subjected to the same price pressure from OEMs as current Tier 1 suppliers, which will cap its operating margins. Being a tech player and offering a somewhat differentiated and highly engineered product, I assume LAZR would be able to command higher pre-tax operating margins of 12.5%. These are more than 2X of an average automotive supplier and even higher than a typical electronics company.
Luminar Tech will need to continue to invest in PPE and R&D efforts in order to achieve this growth. I assume their sales/capital ratio will improve from current 0.3 to 3 gradually over this period. Note that this is still higher than the industry average of just under 2. Further, I assume Luminar would be able to achieve a terminal return on capital of 15%, much higher than their WACC of 10.6% and higher than industry average of 11.7%.
I believe these underlying assumptions are fairly generous. With these assumptions, my valuation results in an equity value of $71MM for the company or just ~$0.16/share, making the equity essentially worthless.
FCFF Valuation Model ($ million)
All the potential upside baked in…
Two critical drivers of the above valuation are the terminal revenues and the terminal operating margins. Therefore, I tested the influence of these two assumptions on my valuations using What-if analysis. I varied FY2030 revenues from $1.4B to $5.6B (higher than the order book projections from Luminar at ~$5B) and operating margin from 8% to 24%. Value of equity was computed for various combinations of these 2 variables. The results are presented in the table below with the values of equity exceeding the current price highlighted in bold. From the table, once can see that the current price already assumes a minimum revenue of $3.8B and a minimum operating margin of 19% by 2030. These are extremely optimistic assumptions, and are already baked into the current price. Therefore, I do not see any upside in Luminar Technologies, Inc. stock.
Risks of technology adoption and competitive landscape…
I see considerable risks ahead for Luminar Technologies, Inc. - adoption of Lidar technology, OEM pricing power, a competitive landscape and potential leakages from the order book, being the primary ones.
Technology adoption - Luminar is dependent on a single technology, which is Lidar. There are alternate competing technologies in the ADAS and L3+ autonomous driving space. Vision and radar are two such promising technologies. While each of these 3 technologies have their specific advantages and limitations, it is worth noting that radar is particular in inching closer to Lidar in terms of performance while being a much cheaper and a proven technology. Most promising alternative at this stage looks to be a fusion of different sensors, of which Lidar may be one (in higher end applications). The risk of these alternate technologies supplanting the use of Lidar completely or partially is huge for Luminar.
https://www.mdpi.com/1424-8220/21/16/5397 (An Overview of Autonomous Vehicles Sensors and Their Vulnerability to Weather Conditions - Jorge Vargas, Suleiman Alsweiss, Onur Toker, Rahul Razdan and Joshua Santos. July 2021)
Competition in Lidar space - Even if Lidar becomes the technology of choice for these applications, the competition in this space has grown significantly. Competition is coming from both start-ups and established Tier 1 players developing their own technologies or acquiring start-ups. Therefore, there is no assurance that LAZR's technology will become a dominating force in the market.
Automotive OEM Pricing Power - Automotive industry is dominated by large players with immense pricing power over small suppliers. Although Luminar may think of its products as premium ones, it is likely to face pricing pressures, compressing its margins. Auto industry also demands its suppliers to continuously seek to reduce their production costs and pass a large portion of these savings to the OEM in the form of lower prices. OEMs may not want to deal with such small suppliers like LAZR directly. This may force LAZR to be acquired or in the worst case, having to sell its product via a Tier 1 sensor integrator, further putting a squeeze on Luminar's margins.
Order book may not yield equivalent revenues - There is a risk that some of the commercial agreements in Luminar's order book may not result in series production at all. Furthermore, production volumes may be lower than anticipated and/or volume production may be pushed out into the future, denting revenue projections for Luminar.
Playing convertible debt, perhaps?
Luminar Tech has $625MM face value of convertible notes outstanding, which mature in December 2026. For those still bullish on Luminar Tech, this might present a better alternative than owning stock. These notes come with a coupon rate of 1.25% and a conversion option at an equivalent price of $19.98/share. Currently, these notes are selling for about 65 cents on the dollar, which results in a very attractive yield to maturity of 13.8%. While this discount questions the viability of LAZR as a going concern, I believe Luminar would be able to pay off this debt. Luminar typically makes large investments (in acquisitions, large partnerships etc.) by issuing more equity and currently, has $489MM of cash on hand. While being dilutive to equity investors, this strategy does allow them to conserve cash. By investing in this convertible debt, one gets a healthy YTM while having an option to still partially participate in the upside if the stock price were to jump above $20 in the next 3.7 years.
Conclusion
Luminar Technologies, Inc. is vying to become a preeminent player in the high-end Lidar sensor hardware and software markets. It is taking prudent actions to pursue automotive ADAS markets in the near term, with enabling L3+ autonomy as a longer-term bet. However, even with a very optimistic revenue growth and operating margin acceleration, LAZR seems to be extremely overpriced currently. All of the potential upside in Luminar Technologies, Inc. stock is already reflected in its price and, therefore, it is better to avoid the stock at this price. Its convertible debt may offer a better alternative for those still bullish on the stock.
For further details see:
Luminar Technologies: Don't See Any Upside Here