Luminar On The Verge Of Growth But Not New Highs (NASDAQ:LAZR)

Luminar Technologies, Inc. (NASDAQ:LAZR) recently announced a major milestone – production beginning ahead of schedule – priming the lidar maker for rapid upcoming growth over the next few years as mass production kicks off. Luminar will be outfitting SAIC Motor’s Rising Auto R7, AB Volvo’s (OTCPK:VOLAF) EX90, and Polestar Automotive Holding’s (PSNY) 3 to start, as well as future Mercedes-Benz, Audi, and Nissan vehicles, to name a few. Luminar is in the early innings of its growth story, but with its cash balance on high alert with an R&D intensive business, Luminar’s stock is unlikely to reach new highs in the $20s for quite some time.

Production Milestone Reached

Luminar is finally scaling into series production of its Iris lidar units, with them set to be deployed on China’s largest automaker SAIC’s Rising Auto 7. CEO Austin Russell said this is the first time that lidar is evolving from R&D to consumer vehicle deployment.

Earlier in the year, Luminar began preparations for increased production capacity in light of commercial wins and increased volume expectations; production capacity at the automated facility is expected to run about 250,000 units annually in addition to production with partner Celestica. The new facility is not expected to come online until the second half of 2023, likely reaching its maximum run rate by late 2024. Luminar is still in the early innings of its growth story, with production scaling significantly in about six quarters.

Reaching this production milestone not only sets Luminar on a path to record growth ahead of numerous commercial wins and vehicle deployments, but it also signals that the lidar industry is at a transitioning point from an R&D moon-shoot effort to a full-fledged commercialized industry.

Signs Of Growth

Luminar is showing signs of growth ahead of mass production and vehicle deployments at scale in late 2023 and 2024. However, lidar product revenues have yet to record growth, with a slight y/y decline this quarter as growth was driven mainly via Luminar’s ATS (advanced technologies and services) segment.

Revenues for Q3 reached a record $12.8 million, +60.3% y/y, as YTD revenues grew 50.9% to $29.6 million. While services still constitute a majority of revenues for the time being – about 66% of YTD revenues – product revenues are showing substantial signs of substantial growth.

Product revenues jumped 553% y/y to $6.8 million during Q3, but this growth was completely driven by growth in Luminar’s IC, pixel-based sensor, and advanced laser business, not the lidar side, given that mass-production has not yet kicked off. Revenues in the ATS segment jumped 1,303% y/y to $6 million, while autonomy solutions (lidar) revenues declined 10.2% to $6.8 million.

The combination of growth in ATS as lidar production kicks off signals positive synergies for Luminar’s revenue growth in 2023, as volume production scales and lidar revenues start to meaningfully impact the top line. For the moment, Q4’s revenue guidance of $11 million to $13 million suggests a similar dynamic, with lidar revenues not yet growing significantly as the ATS segment performs about flat q/q.

Revenue Growth Ahead As Deliveries Begin

Moving on to 2023 to 2025 is where Luminar is likely to see a significant acceleration in lidar revenue growth rates, as mass production begins and as major OEMs begin to scale production of vehicles equipped with Luminar’s devices.

SAIC’s Rising Auto R7 recently hit the market, and will likely drive lidar volumes and revenues for Luminar in the first half of 2023 as the model scales production. Volvo’s EX90 is expected to start production and hit the market in late 2023 as a 2024 lineup addition, with production scaling in 2024; Polestar’s 3 is expected to start Chinese production in mid to late 2023 and US production in 2024. Mercedes-Benz Group AG (OTCPK:MBGYY) and Daimler have not disclosed details about a launch date for when Luminar’s Iris lidars will be integrated into vehicles.

Nissan’s (OTCPK:NSANY) ground-truth perception technology is in development, with the automaker aiming to complete development by the mid-2020s to deploy the tech on “virtually every” one of its new models by 2030 – this alone could represent a 4 million vehicle opportunity by 2030. Nvidia’s (NVDA) Drive Hyperion 8 autonomous vehicle development architecture features Luminar’s Iris, with the platform available for 2024 production vehicles – Jaguar Land Rover is adopting the platform for vehicles in 2025.

Luminar has a multi-faceted growth opportunity for its burgeoning lidar segment, working directly with OEMs or via AV platform developers like Nvidia. Revenues in FY23 are expected to grow ~180% to $120 million as Luminar’s production scales and as vehicle models adopting Iris enter production; for FY24, the growth picture becomes more cloudy, as the ability for some of Luminar’s main customers to scale production of lidar-equipped vehicles comes into question, especially should parts and chips shortages persist into late 2023.

New Highs Not Likely Yet

Even though Luminar is on the verge of beginning a triple-digit revenue growth runway as leading OEMs adopt its lidar and enter scaled production of lidar-equipped models, the stock may not be able to reach new highs over the next four quarters, as it is still at a small scale with a rich valuation, while losses are expected to grow.

Still At A Small Scale

Luminar is still at a small scale – just take a look at the fact that serial production just began, while lidar revenues have to take off. The company is on track to record marginal q/q growth in Q4 due to contracts pulled forward to Q3. Revenues just reached a record of $12.8 million, $0.5 million higher than Q4 ’21’s prior record figure.

At FY23’s expected $120 million in revenues, Luminar is still richly valued at ~23x forward sales. Compared to peers, Luminar is among the most expensive – Cepton, Inc. (CPTN) trades at 10x forward sales and expects to begin supplying lidar to General Motors (GM) in late 2022 and 2023, Innoviz Technologies Ltd. (INVZ) trades at 19x forward sales, with a massive $4 billion order from Volkswagen’s (OTCPK:VWAGY) Cariad and a supply deal with BMW (OTCPK:BMWYY).

Given the Fed’s recent hawkish tone and signal to keep rates higher for longer to quell inflation, high-growth tech stocks are struggling to maintain rich valuations; cloud stocks recently suffered one of the latest setbacks as Cloudflare, Twilio, and Atlassian plunged following earnings after weakness in big tech earlier in October. With Luminar’s rich valuation at 23x 2023 sales and a probable long road to profitability – and downside risk should customers struggle to initially scale new vehicle production in the second half of the year – Luminar may find substantial headwinds to reaching substantial upside through 2023.

Luminar shares could find difficulty reaching upside in the high teens, as seen in Q1, given that $16 per share equates to a ~$5.8 billion valuation. There’s just not enough to surprise to that degree over the next two to three quarters to drive a valuation back to those levels at 16x 2024 sales.

Losses Growing

Developing lidar is an R&D-intensive business with high capital needs, and Luminar is likely to continue recording widening losses as it scales production and prepares lidar for mass deployment in vehicles.

Operating losses continue to grow, reaching ($115 million) for Q3, up from ($104.4 million) in Q2 – operating losses have continuously widened since Q1 ’21. R&D expenses jumped by $20 million, or ~77%, from last year’s quarter, as Luminar needs to continue pumping cash into R&D to remain ahead of competition and continuously develop its lidar to improve detection.

Luminar intends to outline its path to profitability at Luminar Day in February, but seeing as R&D cannot just be scrapped and as operating expenses are likely to expand further in 2023, Luminar is still likely three years from reaching profitability, at a minimum.

Luminar’s margin profile sheds further light on to how far revenues have to scale in order to set out a clearer path to profitability. For the YTD period, product gross margin was -365.4%, while services gross margin was -34.2%; total gross margin was -147.7%; in 2021, product gross margin was -130.1%, services 8.0%, with a total gross margin of -33.9%. Costs of sales nearly tripled y/y so far, and unless costs of sales grow less than 30% during FY23, Luminar is not set to even reach gross profitability until sometime in 2024 or later.

In addition, Luminar has highlighted that it has “sufficient capital plus a healthy cushion to reach positive cash flow and profitability,” with about $550 million in cash and equivalents at the moment. Luminar is inching below a $50 million cash burn rate per quarter, again reflective of that ample runway of cash, but a capital raise is not out of the question for 2023 or 2024.

Outlook

Luminar recently hit a major milestone, reaching the start of production ahead of schedule, with multiple vehicle models set to adopt Luminar’s Iris over the next four to six quarters. A new high-volume production facility set to come online late next year sets the stage for growth to accelerate moving into 2024. Even as Luminar is on the verge of recording multiple years of hypergrowth as mass production and adoption commences, margins have weakened due to the intensive R&D and capital needs of the industry and to scale. A rich valuation relative to peers also suggests a high likelihood that Luminar shares struggle to resume a positive trajectory to push to new highs as the macro picture hangs heavy over loss-making growth stocks.