Summary
- Ouster takes several steps towards closing the Velodyne Lidar deal.
- The combined Lidar sensor companies can provide $30+ million in Q4'22 revenues, providing legitimacy to the sector growth opportunity.
- The stock is cheap with a combined $700 million market cap and '25 revenue target still topping this level.
As the merger with Velodyne Lidar ( VLDR ) approaches the close, the new Ouster ( OUST ) is entering a new day. As the calendar flipped to 2023, the Lidar sector is approaching production deals that start a decade of strong growth. My investment thesis is ultra Bullish on these combined companies riding the Lidar wave with a much strong financial position.
Source: Finviz
Better Together
The non-automotive-focused Lidar players of Velodyne Lidar and Ouster took a big step closer to closing their merger deal with the announcement of an updated BoD. Due to the merger of equals, both companies designated 4 individuals for the new board.
Prime reasons for the merger is as follows:
- Accelerated Lidar adoption.
- A more robust product suite and expanded commercial reach.
- A unified team for top-tier customer support.
- Strengthened financial position extending the cash runway.
One of the alarming aspects of the Lidar stocks going public via SPACs were the quarterly reports where the companies would report minimal revenues. While a lot of the SPAC companies were reporting quarterly revenues of only $1 to $2 million, Velodyne Lidar reported revenue declines from operational dysfunction and supply chain issues.
The stocks are surging due to the much better financial position of the combined entity along with the confirmation of hitting Q4'22 guidance as follows:
- Velodyne: billings of $13 to $15 million
- Ouster: revenues of $10 to $25 million
- Total revenue: $25 to $40 million
Ouster provided 2022 guidance of $40 to $55 million, amounting to $10 to $25 million in Q4'22 revenues, following $30 million in revenues through Q3. The company hitting guidance is a positive, though the market definitely wants to see the Lidar company reach the $15+ million consensus analyst target for the quarter. In order for the stock to rally, Ouster needs to report solid growth and expansion above the previous record revenue of $12 million back in the prior Q4.
The combined company would report Q4'22 revenues of ~$30 million and open up a new day for investors troubled by sector stocks commonly only generating minimal quarterly revenues. At that quarterly revenue level, the Lidar business starts looking far more "real" to the market not taking the stocks serious in 2022 when they dipped below $1.
Based on doubling the current Ouster valuation of $350 million, the combined company will have a market cap of $700 million. The combined 2023 revenue estimates are in the $161 million range, though the Velodyne Lidar numbers are extremely low, knowing the ramp in Lidar demand this year.
The market that once looked past the big revenue targets of the Lidar firms might finally start taking a bigger interest. The combined revenue targets are as follows:
- 2023: $161M, Ouster - $101M, Velodyne - $60M
- 2024: $348M, Ouster - $227M, Velodyne - $121M
- 2025: $714M, Ouster - $495M, Velodyne - $219M
As one can see, the consensus estimates have low expectations for Velodyne Lidar despite original targets for 2024 revenue of $684 million . The company isn't likely to approach those targets now, but the non-automotive Lidar specialist probably wasn't going to trail the sales results of Ouster by this dramatic of amounts.
Velodyne Lidar quit providing forward order book estimates, but Ouster last provided a Q2'22 contracted revenue opportunity of $575 million through 2026. Both companies have a lot of strategic customers, with Ouster alone having 84 SCAs and 700+ customers purchasing Lidar sensors in the last year alone.
Extending the Cash Runway
The new company ended 2022 with a cash balance of $315 million, down $40 million from the September quarter. The new Ouster forecasts saving $75 million in costs from the September 30, 2022, cost structures after both companies had already implemented cost savings programs earlier in 2022.
For Q3'22, Ouster reported a non-GAAP operating loss of $28 million while Velodyne Lidar loss a similar $28 million with operating expenses of $25 million. One can quickly see how stripping out upwards of $20 million in quarterly expenses contributes to a far different financial picture for these Lidar companies.
Velodyne Lidar was reporting negative gross margins with a slow production shift to Thailand and a lack of chips. A big part of the extended cash runway is producing the larger revenue set allowing for the contribution of sizable gross profits to cover reduced operating expenses.
As the above revenue targets highlight, the new Ouster quickly gets to $50+ million in quarterly revenues by 2024 and might end the year with $100 million in Q4 revenues. A simple 50% gross margin will throw off anywhere from $25 to $50 million in gross profits to cover operating expenses and possibly fund more spending on research and development to expand the Lidar product and software offerings.
A big key to the investment story is that the company gets to 2024 in a great financial position when the non-automotive Lidar sector is starting to move full-speed ahead with production programs. Even Luminar Tech. ( LAZR ) is starting to announce automotive deals moving to production by implementing Lidar into non-autonomous vehicles as an additional ADAS feature such as this expanded deal with Polestar Automotive Holding ( PSNY ).
Takeaway
The key investor takeaway is that the new Ouster enters 2023 in a new day. The company should turn into a real business moving towards production deals while the financial picture is vastly improved. The market will re-rate the stock as the business starts appearing legitimate and investors can start counting on large order books.
For further details see:
Ouster: New Day