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Eight publicly listed companies represent a competitive landscape in today's lidar business. Each promotes superiority through assertion about exclusive and unique tech. Some have used customers' names to advertise business relations, and as a result, their stock's value has increased significantly. Since the market appreciates the complexity and the time required to put a lidar sensor in the consumer vehicle, investors are paying for it having expectations of future revenues.

Still, having agreements does not eliminate the risks or guarantee orders. A quote from Luminar Technologies, Inc. (LAZR) 10-K describes this effectively:

"Through the end of 2021, none of our customers have completed their ongoing testing and validation or have entered into definitive volume production agreements with us, and there is no assurance or guarantee that any of our customers, including any for which we have announced a "major win" or "major commercial win" will ever complete such testing and validation or enter into a definitive volume production agreement with us or that we will receive any revenues forecasted in connection with such "major win" or "major commercial win." The development cycles of our products with new customers vary widely depending on the application, market, customer, and the complexity of the product. In the automotive market, for example, this development cycle can be if seven or more years. "

Luminar's valuation is the highest among lidar companies at $4.3B, likely due to having most testing deals with well-known brands, including AB Volvo (OTCPK:VOLAF), majority-owned by Volvo Polestar, and Mercedes-Benz Group AG (OTCPK:DMLRY). The market capitalization shows tremendous enthusiasm for the company, but it is also a considerable risk to investors considering lidar as the next industry to invest in.

At this stage, OEMs are shopping for a solution and taking bets. There is no superiority of a specific company and its technology but just an early potential. Porsche invested in 2019 in Aeva Technologies, Inc. (AEVA), yet the company hasn't produced sensors on any significant scale and plans to reach that point only in 2024. There is also evidence of past agreements which did not land orders. Quanergy Systems, Inc. (QNGY), a private company in 2014, announced a deal with Mercedes. Also, in 2017, a private equity-owned Velodyne Lidar, Inc. (VLDR) announced a deal with Mercedes, but both landed no orders.

The question about technology leadership still poses a challenge due to early adoption. A quick review offers little clues as to who would emerge as a winner.

Micromotion technology or MMT - Cepton, Inc. (CPTN) R&D $24M 2021.

CEO & Co-Founder Dr. Jun Pei describes it as a reversed speaker cone and a sound fork. The slide below explains what makes the difference between Cepton and others. The comparisons are made to present Cepton as superior, a notion every company uses in their presentations.

To help describe other lidar technologies used, I reached out to the 2020 white paper produced by the staff of Texas Instruments. I edited some of it for better legibility.

Microelectromechanical systems or MEMS LIDAR – Velodyne, Luminar, Innoviz Technologies Ltd. (INVZ), and AEye, Inc. (LIDR). 2021 R&D spent $287M.

"A MEMS LIDAR system uses tiny mirrors whose tilt angle varies when applying a stimulus such as a voltage. The MEMS system substitutes mechanical scanning hardware with an electromechanical equivalent. The receiver light collection aperture that determines the received SNR is typically quite small (a few millimeters) for MEMS systems. To move the laser beam in multiple dimensions requires cascading multiple mirrors. This alignment process is not trivial, and once installed, it is susceptible to shocks and vibrations typically encountered in moving vehicles. Another potential pitfall with a MEMS-based system is that automotive specifications start at –40°C, which can be challenging for a MEMS device."

A frequency-modulated continuous-wave or FMCW LIDAR – Aeva 2021 R&D spent $75M.

"While the methods listed are based on the ToF (time of flight) principle using narrow light pulses, FMCW LIDAR uses a coherent method, producing brief chirps of frequency-modulated laser light. Measuring the phase and frequency of the return chirp enables the system to measure both distance and velocity. Although the chirp generation adds complexity, the computational load and optics are more straightforward with the FMCW method."

AEye has disputed FMCW as unproven in most of its claims. I have attached the link here for those interested in reading this material.

Time of Flight vs. FMCW LiDAR: A Side-by-Side Comparison.

Optical phased array or OPA – Quanergy 2021 R&D spent $17M.

"The OPA principle is similar to phased-array radar. In an OPA system, an optical phase modulator controls the speed of light passing through the lens. Similar methods can also steer the back-scattered light toward the sensor, thus eliminating mechanical moving parts."

CEO of Ouster, Angus Pacala, co-founded Quanergy but left the company to start Ouster.

Flash LIDAR – Ouster, Inc. (OUST) 2021 R&D + Acquisition of Sense Photonics spent $95M.

"Flash lidar operation is similar to a standard digital camera using an optical flash. In flash LIDAR, a single large-area laser pulse illuminates the environment in front of it. A focal plane array of photodetectors placed close to the laser captures the back-scattered light. The detector captures the image distance, location, and reflected intensity. Since this method captures the entire scene in a single image compared to the mechanical laser scanning method, the data capture rate is much faster. In addition, since the entire image is captured in a single flash, this method is more immune to vibration effects that could distort the image."

It is challenging to say what technology has a commercial edge in the automotive OEM area. For example, for all four companies that use MEMS technology, what advantage do they have over each other?

Luminar has more deals, but I do not see much advantage of Luminar over the other three companies using MEMS. I am also unclear how MEMS devices will become upgradable to meet smaller form factors or solve cost challenges versus the digital flash lidar path. A journey that is much easier to understand, following Moore's law and exhibiting the evolution of the digital camera.

Innoviz and AEye have contracted with parts manufacturers. AEye with Continental without identifying an automotive OEM, and Innoviz with Magna International Inc. (MGA) to produce their lidar sensors for BMW. Similarly, Cepton has a deal with Koito Manufacturing Co, Ltd. (OTCPK:KOTMY) to manufacture its lidar sensors for General Motors Co. (GM).

By acquiring Sense Photonics, Ouster is also in an automotive lidar testing stage with a major Detroit-based OEM. In addition, 5 OEMs are reviewing the digital shutter flash sensors, and Ouster thinks they can close two of those reviews into contracts in the next two years. All companies state in their disclosures, like Luminar did, the risk of not getting series production orders.

Ouster predicts C samples only in 2024, while Luminar has them at the end of 2021, and Cepton plans to complete them in Q2 2022.

But Ouster is offering level 5 of advanced driver assistance systems (ADAS) by offering a multi-sensor solution at $1000 by 2025. All other deals currently offer one sensor facing forward, capable of L2 to L3 automation for highway driving and safe collision avoidance.

"Digital flash series of sensors offer different form-factors and sensor configurations to provide varying ranges, fields of view, and vehicle design freedoms – all with a simple change in optics or housing."

Finally, if the cost for the suite matches one front-facing sensor, giving L5 capacity, it is easy to see Ouster's advantage.

DF sensor road map (Ouster Inc.)

But Ouster is much more differentiated from the competition because its revenues grow independently of consumer auto deals. They make Ouster immune to a "one-customer" dynamic and a possibility of risk faced by others when tests will not bring orders.

Being skeptical about technology, I let the customers of each company validate the adoption through revenue.

My first tool is market capitalization against revenue expectations. Based on forecasts for 2022 and 2023, Ouster has the most significant revenue at 32% of the total for the group in 2023. As a portion of the group's total market capitalization, Ouster holds only 8% compared to 55% held by Luminar.

The Market Capitalization vs. Revenue (Author sourced from Yahoo Finance)

Velodyne is the next company on the list, with the most revenues in 2022. However, expectations for Velodyne see revenue shrink this year. The loss of revenue is a big problem in a growing industry as it may signal that the technology cannot keep up with expectations. Velodyne uses MEMS in its front-facing sensors. Out of 15,000 sensors sold in 2021, 2,400 were MEMS sensors. The more exotic mechanical sensors, which made the company an absolute top seller of lidar sensors, with 64,000 sold from the inception of the company, are the ones that appear to be losing the market share.

Ouster sold 6,500 sensors in 2021, and product revenue generated per unit was $5.2K. Velodyne received $3.2K. In Q4, the average unit sold for Ouster brought $4.9K, while Velodyne sold its unit, on average, at $2.7K.

If the price was only one factor in creating demand, Velodyne selling for less should expect more of it, but that is not the case. What is even more dramatic is that the 2021 product revenues of $48M have cost Velodyne $67M, a 40% negative gross margin. In contrast, Ouster had a 27% gross margin.

David Hall, the founder and now ex-chairman of the company, described Velodyne's problems in his letter to shareholders:

" Despite claiming to be on the "path to profitable revenue growth," Velodyne Lidar saw a ~35% year-over-year decline in total revenue and delivered a $212 million net loss for the fiscal year 2021. The company reported earnings of approximately $62 million in the fiscal year 2021, down ~35% and ~39% from fiscal years 2020 and 2019, respectively. Looking ahead, management's guidance for the first quarter of the fiscal year 2022 was disappointing, with expected revenue between $10 to $12 million compared to analysts' consensus of $19.38 million."

Analysts forecasted Velodyne's 2022 revenues at an average of $51M, a further 14% drop from 2021. Ouster's average expectations are at $74M, a 117% increase, but the company has guided revenue potential as high as $85M.

Another fragment of the David Hall's letter resonates with Ouster's 2022 forecast increase:

" We believe the current Board has failed to prioritize core lidar technology research and development, causing Velodyne Lidar to fall behind while competitors gain crucial market share. In our view, the company has failed to properly allocate resources to innovate the lidar product, add software or expand the product suite."

I find the comment particularly interesting because Velodyne spent $78M in R&D in 2021, the third most, versus Innoviz at $93M and Luminar at $88M. Yet, it failed to innovate in the eyes of its deepest insider and, most recently, biggest shareholder.

OPEX vs. Product Revenue (Author, selected company financial data)

At the current price of $3.50, based on a market capitalization to revenue ratio for 2022, Ouster trades 8.10 times the revenue. Luminar is trading at 103 times but not as high as an absurdly elevated valuation for AEye , at 152 times. A deeply discounted Ouster reaching $1B in revenue, my estimate for 2025 or at latest 2026, would become an $8.1B company with a $47 per share, delivering 1243% ROI.

The revenue diversification, combined with the lowest valuation versus revenue in 2023, makes Ouster the only choice for an investor intrigued by the lidar and its applications. It is a choice supported by having the least amount of risk due to overvaluation while observing the best revenue growth potential.

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Disclosure: I/we have a beneficial long position in the shares of OUST either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.