Investing In Lidar, Mid-Year 2023 Update
All West-based public companies have reported results for the second quarter, so I have compiled a financial review comparing operational statistics. I have written articles this quarter about Luminar (LAZR) and Innoviz (INVZ). Since the publication, Innoviz had a share offering generating $65M in cash based on selling 29M shares at $2.50/share.
Except for Avea (AEVA), which reported a new engagement in separate news, and Innoviz, which addressed the potential of an extension with BMW (OTCPK:BMWYY) using new hardware products and a new B sample, others delivered essentially the status quo, highlighting previously described objectives with updates on milestones.
Luminar commands the highest valuation among the mentioned companies. The company’s collaboration with OEMs has garnered significant attention and has added considerable value to the stock. In the second position, we find MicroVision (MVIS), which is surprising due to its limited revenues and a lack of notable design wins. However, it’s important to note that these valuations primarily reflect the potential these companies hold. Many of these valuations are rooted in future estimates or anticipated developments.
In terms of revenue for the initial part of the year, Ouster (OUST) has achieved its highest recorded revenue of $36M. The current projection for this year anticipates the company reaching $82M, although Luminar is poised to surpass that figure with an estimated $86M. The forecast models indicate a more pronounced growth trajectory starting in 2024. During this period, Luminar is projected to surge beyond $270M, while Ouster is expected to maintain an average of $136M.
It’s worth noting that Wall Street doesn’t consistently rely on the revenue-to-market ratio as the sole determinant for valuations. The only discernible premium associated with value creation is the count of OEMs and design wins.
Shifting the focus to cash levels, the table does not include Innoviz’s equity sale, which has contributed $65M. Even when factoring in this amount, the company would still hold the 4th position on the list.
The following table shows that expenditures on research and development (R&D) remain substantial. It is not unexpected to see Ouster secure the second-place position behind Luminar. The company intends to unveil a novel sensor tailor-made for the automotive vertical and will likely utilize significant resources on this objective. A digital flash sensor, categorized as an early B sample, is set to go on a global tour to engage with OEMs throughout the third quarter. While the Q2 call offered some initial insights, I anticipate more comprehensive details to emerge in Q3, shedding light on the capabilities of this product. The final B sample will have a brand new Chronos chip to be taped out this year. The existing L3 chip powering OS sensors is also being upgraded with taping out of L4 later this year.
During the first half of 2022, lidar companies collectively invested over $277M in R&D. In the entirety of 2022, this same group of companies allocated $555M million toward R&D efforts. As of the midpoint of 2023, the cumulative R&D spend totals $356M. It’s foreseeable that the pace of expenditure will decelerate, particularly as a significant portion of the funding originates from Luminar, actively striving to curtail expenses in the latter half of the year.
The table below represents a full review of the industry’s spending for this year compared to the same timeline in 2022. I have replaced Velodyne with MicroVision since Velodyne merged with Ouster. The net cash used in operations for Ouster has been adjusted for merger costs to allow for a more aligned comparison with other companies.
Finally, the last table represents a breakdown of the operating expenses for the first half of 2023. As with the R&D figures, all costs would include share-based compensation, a noncash metric. Sometimes, companies will either show those in non-GAAP reconciliations or describe them in their narrative. I use net cash used in operating activities as an actual figure to assess the cash spent. While the pure comparison of cash may yield a higher reduction in a period, the balance between cash used in operating activities versus the decline is likely allocated to other lines of the balance sheet, such as inventory, assets, or paid expenses.
The lidar business is gaining momentum as OEMs actively pursue new design wins within the upcoming six months. However, regarding revenues and commercialization, there appears to be a disconnect or limited impact on earnings. Among the companies, Innoviz, with its involvement in BMW’s 7-Series, Cepton (CPTN) with Cadillac Celestiq from General Motors (GM) this year, and Luminar with Volvo (OTCPK:VLVLY) EX90 and Polestar (PSNY) for models 3 and 5 in the following year, are all poised to witness revenue generation from the start of production. Revenue recognition for initial design deals seems to be constrained and mainly underwhelming. However, Luminar has the most promising potential to disrupt this trend.
In Q3, Ouster pledged to provide an updated and comprehensive outline of its journey toward profitability, coinciding with the finalization of its merger with Velodyne. Since the merger’s completion, the company has undergone a revision of its strategies, aiming to curtail expenditures and streamline costs, resulting in a reduction of over $110M in ongoing expenses in contrast to the independent operating costs of both companies, as recorded during Q3 2022. This planned rate of decline is slated for the exit of the fourth quarter of this year. Remarkably, Ouster has already succeeded in slashing the cumulative expenses by $90M during the first half of this year. It’s worth highlighting that the company’s commitment to cost containment has propelled it beyond the initial target of $75M in cost savings, as initially outlined in the merger plan.
Within the sphere of concerns, the cash runway emerges as a significant challenge for AEye (LIDR), with the looming potential of depleting funds within a year if spending patterns persist. The company’s heavy reliance on its partnership with Continental (OTCPK:CTTAF) is evident, underscored by the utilization of AEye’s design in the HRL 131 sensor marketed by Continental. Despite the anticipation of production in 2024, the confirmation of design wins remains pending. However, it’s unmistakably clear that AEye lacks sufficient funds to sustain itself until 2024.
The potential of an extended collaboration with BMW carries the weight of validating Innoviz’s hardware and emphasizing the company’s capability to secure second-generation deals. However, a rather unexpected equity sale, a week after the company’s results were reported, and the conference call when the CEO Omer Keilaf, in a worst-case scenario, engaged the potential to ask customers for prepayment of NREs added more concerns:
Yes, so our run rate as you probably noted from this quarter and looking back on the previous quarter, we are not spending more money. It’s actually going down, but it’s roughly stable and will still stay stable. On the other side, we do expect these revenues coming in, in addition to the NREs that are supporting our cash flow. So, we think this will support us and maybe we’ll see over time a better and better cash flow.
Maybe I can add to this. So, we are expecting some NRE already this year and we’re talking about bookings of NREs that the high end of it and our target is $70 million. In front of us, there is a bigger opportunity, which is very meaningful in our ability to fund our activities. I would add that in part of this, we are in discussion with our strategic customers in regards to pulling in prepayments and NREs in order to strengthen our balance sheet.”
What drove the decision to issue shares – was it a strategic move guided by prudence, or does it hint at a potential lack of confidence in closing the deals? Time will eventually reveal the truth. Nonetheless, whether the subject is Innoviz or any other entity, the capability to secure a design contract with OEMs unquestionably enhances the overall value proposition for every contender in this group.
My current ratings are listed below. My recommendations have not changed based on the results of the second quarter.
I currently do not have any ratings for Cepton or AEye. I consider both companies non-investable, a viewpoint I elaborated on in an earlier article this year. This is mainly due to the perceived risk of depleting cash reserves and a lack of clarity regarding future growth prospects.
Considering the financial data, I am inclined to withhold a rating for Aeva. However, given its commercialization progress, I might view Aeva as a plausible investment target. The available cash reserves offer more substantial potential for success than the other two companies.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.