Luminar Stock Offers High-Risk Pure-Play on Lidar
Birds of a feather flock together. First, we had all the electric vehicle stocks back their assets up into a special purpose acquisition company (SPAC) in reverse merger arrangements that sent shares soaring before deals even closed. Now, it appears that LiDAR companies are following suit. Since there is strong interest from our readers on these disruptive tech IPOs, SPACs or not, we’re going to cover one today – Luminar – which is looking to go public via SPAC on the heels of Velodyne.
The First LiDAR IPO
We first talked about Velodyne’s initial public offering through a SPAC and noted that shares are now up +80% because of a deal that’s supposed to close this quarter. (All SPACs start at $10 per share, which makes it easy to see how high the Robinhood mini-ballers have pushed it.) We advised that investors should (and this may sound like crazy talk to some of you) wait until the transaction closes before doing anything. Once shares soar yet again on news of the deal actually closing, speculators will move on to the next target. Just wait until shares resume some sort of normal trading pattern, then consider opening a position.
Only after the dust settles would we consider taking a position in a company that appears to be a leader in LiDAR technology. And even then, we’d need to look past Velodyne’s declining revenues (it’s all part of their master plan) and the fact that His Holiness Elon Musk of Tesla has said that LiDAR is a fool’s game for self-driving cars. We also need to consider all the competitors in this space, one of them being Luminar, a company that plans to offer shares to the public via a SPAC called Gores Metropoulos (GMHI),
We first came across Luminar in our article on 9 Startups Developing LiDAR Sensors for Cars in which we noted that “Luminar stands out from competitors in the space because they build their LiDAR sensor from scratch.” The man behind the company is Austin Russell, someone who makes us wonder why we’ve squandered our lives so far. In 2012, Mr. Russell founded Luminar at the age of 16, and the following year dropped out of Stanford – as you do – to focus on growing his company. Today, he wants you to invest in his vision of future revenues, which brings us to our first point of contention.
There are numerous reasons we believe that SPACs, as they operate today, are not good for retail investors. As researchers, at the top of the list we’d put the lack of an S-1 filing document. (There is a Super-8K document that gets filed after the fact, but this doesn’t usually accompany the investor deck which means not all the information is made available prior to speculators climbing on board.) Indeed, this is a perk for the company going public. Not having to undergo the stringent due diligence process associated with filing an IPO is a benefit, but it also means that the S-1 filing document gets replaced with a forward-looking glossy investor deck which does nothing but preach the merits of the investment. Fortunately, we’re here to play devil’s advocate.
The Luminar IPO Investment Deck
Here’s a summary of the investment deck with page numbers noted in case you want to see what we’re paraphrasing.
Following the usual leadership team slide (4) we have an overview of the firm taking Luminar public (5). They have experience with SPACs which is good because that’s kind of what they’re getting paid to do. It also talks about one-year returns of previous SPACs, which may be of interest to speculators, but not investors who are holding for the long term. Next is the usual “our total addressable market (TAM) is huge” slide (7) which notes their many partners and their relationship with Volvo which is expected to showcase Luminar software and hardware in a Volvo car by 2020 (estimated):
- 50 OEM and other commercial/strategic partners, including 7 of the world’s top 10 automakers
- Luminar hardware and software powering Volvo’s next-gen consumer vehicle platform, starting in 2022E
Their business has been growing rapidly (8) and they offer “the world’s first autonomous solution for series production (9)” which targets autonomy and advanced driver assistance (10). Again people, the TAM is huge (11). They already have this big deal with Volvo (12) which is a result of their breakthrough innovations and industry-leading performance (13). They are the only player meeting all OEM requirements for autonomy (14), and they plan to maintain and accelerate that advantage through R&D and their existing IP portfolio (15). (Solid strategy lads.) They deliver full-stack highway autonomy (16) which helps add value and save lives (17). They have 50 partners and plans to partner with loads more firms across all industries (18) with their robust partnership funnel (19). They develop in-house and outsource production, (20) and they have a timeline (21).
We’re now 21 slides in and we finally get to the meat of the deck – the financials.
If you’ve looked through many S-1 filing documents, you’ll notice how they don’t do stuff like this:
What you’re seeing above is a forward-looking prediction by the company of what revenues are expected to look like over the next six years. We can only assume they had zero revenues in 2019 because they don’t tell us otherwise. Estimated revenues for 2020 are $15 million, and they increase at the below rates:
- 2021 – 73%
- 2022 – 35%
- 2023 – 254%
- 2024 – 237%
- 2025 – 100%
Back of the napkin math gives us a compound annual growth rate (CAGR) of around +100% which, by any account, is tremendous growth. Hardly seems to be a conservative estimate that takes into account the effects of the rona. Would have been nice to see a range instead, maybe with some Monte Carlo analysis around key variables that can affect these huge growth estimates.
How can we be sure that the company delivers on these promises? If you’re an investor or plan to be one, copy down those revenue targets seen above and make sure the company hits them every year. Promises and $3 won’t get you a venti latte at Starbucks. As we’ve talked about before, we generally avoid investing in companies that promise future revenues because there is too much uncertainty which translates to risk. We’re risk-averse investors who prefer the safety of the software-as-a–service (SaaS) business model that comes with a price premium we’re willing to pay for. While Mr. Russell is a genius visionary who has now created a $3 billion market cap company out of nothing, he now has to deliver on these promises while balancing the increased pain and suffering involved with running a publicly traded company.
Speaking of valuations, seems cheeky to put together a “valuation benchmark” using some of the most hyped names in tech right now – NVIDIA, Tesla, and Nikola Motors – to try and prove you are fairly valued.
SPACs seem here to stay. While all the financial pundits have a big old group wank about how these vehicles are the next best thing since sliced bread, we cannot perform a proper analysis with so little detailed information provided up front. What is provided usually paints the investment in the most favorable terms possible.
On the bright side, the quality of companies on offer seems to be increasing (Desktop Metal just let us know they’re possibly going public via a SPAC), and we’re seeing less of a surge in share price when news breaks of a possible deal to close many months from now (The SPAC that Luminar is backing into, Gores Metropoulos, is seeing shares up only +10% after the initial press release.)
Even if Mr. Musk is right, and LiDAR for autonomous cars is a “fool’s game,” there are a host of other use cases outside of autonomous vehicles. If you’re going to invest in a LiDAR company, choose one that has revenues today. A bird in the hand is worth two in the bush.
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