Cepton: Solving The Cash Problem (NASDAQ:CPTN)

In the last week, Cepton (NASDAQ:CPTN) finally made a move to solve one of the major issues impacting the company and holding the stock back. The Lidar sensor company signed a deal to again raise cash from their manufacturing partner. My investment thesis is far more Bullish on the stock after Cepton raised the necessary cash reducing the need for further dilution.

Making Progress

Cepton reported Q2 revenues grew 186% to reach $2.6 million. The company only sold ~400 sensors during the quarter for what amounts to an ASP of $6,500.

The Lidar sensor company lost $14.5 million in the quarter with an adjusted EBITDA loss of $13.7 million. The company spent over $15.6 million on operating expenses for the quarter and plans to average ~$15.0 million per quarter for the year.

The revenue guidance for the year was cut to between $7 to $9 million. After Cepton generated over $4 million in revenue in the 1H of the year, the company basically guided to flat numbers in the 2H of the year.

The stock collapsed below $2 this year due to limited sequential revenue growth and the inability of Cepton to hit the original $15 million revenue target for this year. Even worse, the company only guided to sensor orders doubling next year based on the current orders on hand.

The problem here is that the ASPs are expected to fall fast on these Lidar sensors to make the cost far more affordable for volume automotive production. The original guidance had ASPs dipping to $1,700 in 2023 and further to $1,000 by 2024.

Along with the SPAC deal, Cepton had guided to 2023 revenues surging to $62 million with the vast majority of those revenues related to smart infrastructure where deals for smart-tolling and security monitoring have slipped due to the macro climate. A scenario where delivered sensors only double each year hardly leads to any revenue growth.

The GM Ultra Cruise deal still appears on target. The company has sent D-sample shipments to multiple vehicle manufacturing plants in one of the final moves before production.

Cepton continues to host on-site technical reviews, including 3 top-10 automotive OEMs to advance ongoing product evaluation projects. Any additional auto deal would provide a big boom to the small company.

Solving Cash Problem

Cepton ended Q2 with a cash balance of only $31 million while already having $9 million in long-term debt. Considering the company forecast spending nearly $60 million in operating expenses this year ($15 million quarterly clip) and gross profits are expected to be negligible, one could easily do the dire math.

Considering Cepton is working with General Motors (GM) on an automotive production deal, the question didn’t really exist to whether the Lidar sensor company would obtain additional funds. The only question was the level of dilution of any such deal.

As such, Cepton agreed to accept a $100 million investment from their manufacturing partner via convertible notes. Koito Manufacturing (OTCPK:KOTMY) agreed to purchase $100 million of convertible preferred stock at $1,000 per share that converts into Cepton stock at $2.585 per share. The preferred stock carries a 4.25% per annum dividend if paid in kind or a 3.25% per annum dividend if paid in cash, in each case paid quarterly in arrears.

Cepton still has access to the $100 million equity deal with Park Capital along with another $15 million remaining on a loan facility. Based on the Koito deal, Cepton should end the year with ~$100 million in cash on the balance sheet without accessing the funds from Park Capital and Trinity. Investors definitely need to focus in on the cash discussion during the Q3’22 earnings call on November 8.

A scenario where revenues surge in 2024 to $250 million, or anywhere far above the $8 million target this year, leads to a quick elimination of the quarterly losses. The biggest problem facing the sector stocks and specifically Cepton is reaching a combination of current sales and reliable orders to provide the stock market with enough confidence the business will survive and thrive.

Elevated Risks

The company is still in a pre-revenue phase with quarterly revenues of only a couple of million. The Lidar market remains in an infancy stage and any slower development than expected will push out the path to profits and could require Cepton to raise additional cash and dilute shareholders.

In addition, the adoption of Lidar remains a major risk to sector participants. Tesla (TSLA) is moving forward with a self-driving solution that doesn’t even utilizing Lidar. As well, a competitor could develop a better Lidar solution, causing Cepton to lose future orders and limited cash could leave the company without the funds to improve their technology to grab future contracts.

Takeaway

The key investor takeaway is that Cepton now has the cash to fully develop the business plan. The stock only has a market cap of $350 million before including any conversion of the new preferred shares.

An investor in the stock has to realize a loss of capital is a real possibility. Ultimately though, the stock valuation remains minimal compared to the opportunity in Lidar sensors. Cepton trades at only ~3x 2024 sales targets while automotive Lidar peers such Luminar Technologies (LAZR) and Innoviz Technologies (INVZ) trade at closer to 5x to 8x 2024 revenue estimates.