Why are LiDAR Stocks Going Down?
Recently I’ve been frequently asked why are LiDAR companies' stocks going down. Although several articles have already been published regarding this matter, I’ll try to present my point of view and cover some of the possible reasons for this recent trend.
Disclaimer: I’m neither a financial analyst nor any kind of a financial advisor, attorney, or accountant. This article details only my guesses, so don’t interpret them as any sort of recommendations or advice to buy/hold/sell any of the mentioned stocks.
Since June 2020, six different LiDAR companies have gone public. All of them through a SPAC merger:
- Velodyne Lidar Inc (VLDR)
- Luminar Technologies Inc (LAZR)
- Innoviz Technologies Ltd (INVZ)
- Aeye Inc (LIDR)
- Aeva Technologies Inc (AEVA)
- Ouster Inc (OUST)
Another LiDAR manufacturer is Cepton that is also in merger talks with Growth Capital SPAC.
The S&P500 gained almost 53% since June 2020. However, 4 out of 6 LiDAR companies’ stocks lost between 19% to 38% compared to their initial nominal price of 10$. While a single company, AEVA, remained relatively at the same level of 10.07$, only LAZR is currently traded at a higher level of 16.53$ than the nominal 10$. However, LAZR’s price is more than 60% down relative to its peak price of 41.8$. Therefore, the overall trend is similar among all companies.
So what causes all the stocks in this small and new industry to sink? I think it’s a mixture of several root causes that I’ll detail below.
Lack of Technology Consensus
Each of the six companies presents a strikingly different technological concept and approach to solve a similar problem of providing a robust, high-performing, small, and cheap LiDAR sensor for the automotive market. These companies don’t agree on any of the main modules of the system: laser source, detector, and scanning technology.
While industry experts still argue about the most appropriate way to develop such a sensor, most investors and the general public are lost and puzzled by the varying technical details. Two additional issues I covered in my previous articles also increase the general confusion: lack of standardization and marketing tricks often used by various companies.
The result is that investors can’t decide how to pick and bet on the winning horse.
Lack of Significant New Design Wins
Some of the traded LiDAR companies presented design wins in the past (like Innoviz with BMW or Luminar with Volvo). Still, the impacts of these pre-IPO design wins have already been incorporated into the company's market value. In parallel, none of the companies presented any new primary design wins post-IPO, especially with a big OEM such as Daimler, Volkswagen/Audi, Ford, Toyota, or Stellantis (a merge between PSA group to FCA). In addition, although there were some design wins with Chinese OEMs, such as Luminar’s with SAIC, western investors are usually less familiar with these OEMs.
On the other hand, on the 9th of September, Cepton announced a significant design win with GM. Accordingly, General Motors plans to start installing Cepton-based LiDAR sensors in as many as nine different models. This design win works in favor of Cepton before its IPO and weakens the positions of other companies.
The lack of new design wins has a double negative impact on the existing LiDAR stocks due to the following reasons:
- The companies can’t present a significant and secured revenue stream for the upcoming years. Of course, the automotive industry isn’t the only relevant market for LiDAR companies, but it remains the most significant one for all of them.
- As I presented in the previous chapter, investors can’t correctly evaluate and choose the winning technology by themselves. Therefore, they hope that a major OEM will do this work for them.
Disappointing Financial Results
Following the previous chapter, the traded companies are unable to present a secured future revenue stream. Besides, their current earnings are constantly lower than expected (see the figure below: red circles are actual earnings vs. grey circles — estimated earnings). In parallel, their expenses are increasing from year to year, or quarter to quarter, with sinking profit margins.
Undoubtedly, such figures can’t fill any investor’s heart with joy.
The Winter is Coming
Every second headline claims that there is a bubble and the bear market is just around the corner. Yet, in parallel, such mega-investors as Ray Dalio (Bridgewater) or Michael Burry (Scion) are taking defensive positions. Besides, Shiller PE Ratio (CAPE ratio), Buffet Indicator, and FINRA’s margin statistics may all indicate a bubble in the market.
However, such bearish prophecies were also common during the previous decade between 2010–2020. Nevertheless, the bull market continued to break records time after time, resulting in one of the best decades ever for the stock market. Moreover, Nobel prize-winning economist Robert Shiller, who developed the CAPE ratio, admits that stock market valuations today are not excessive despite today’s high CAPE ratio. Specifically, remarkably low-interest rates justify today’s stock prices. The same goes for Buffet’s Indicator. At the same time, FINRA’s indicator remained around the current high level in the recent six years, while the market behavior was phenomenal. Finally, even Ray Dalio admitted that his biggest failure came in 1982 when he bet everything on a depression that never came.
The point is that we can’t reliably predict the future behavior of the market. Nevertheless, lots of pessimistic headlines influence the investors. Accordingly, they prefer to opt-out of risky investments in small-cap companies and return to more solid blue-chip companies. Since LiDAR companies are relatively new, without substantial incomes, selling mainly promises for the upcoming years, they fall in the first group. Moreover, the difficulty of the investors to understand the technology behind these companies intensifies their worries. To tackle the last issue, I think it’s crucial to create a common language in the industry that will be clear for the general public, as I presented in my previous article.
COVID-19 Consequences
LiDAR companies are developing a top-notch technology that will be implemented, in particular, in the leading technological achievement of the upcoming years — autonomous vehicles. However, despite the general hype in the industry around 2017–2018, when many anticipated seeing self-driven cars in 5–10 years, the OEMs realized it’d take much more resources, both in time and money. If that was not enough, in 2020 arose the COVID-19 pandemic, with its lockdowns and enormous losses for OEMs. If that was not enough, the shortage in chips also severely impacted the automotive industry.
Therefore, the last year and a half weren’t easy for many companies, but for the car makers in particular. What do most companies do when they must cut losses? Right, they first cut the funds for the most ambitious and advanced R&D projects. These are the same projects which include investments in LiDAR technology.
China’s Market Uncertainty
China is the largest automotive market. In particular, it’s also the largest market of autonomous vehicles. However, the recent steps of the Chinese government against some of the leading technology companies, such as Alibaba and Tencent, are frightening western investors.
Specifically, the most relevant case for our matter is Didi (DIDI), the Chinese ride-hailing giant. Below is a summary to those that aren’t aware of the story behind its IPO (more details in the following article in Forbes):
On June 30, Didi raised $4 Billion in its IPO, which took place on the New York Stock Exchange. It was the most significant American IPO for a Chinese company in 7 years. The stock moved up 15% the first day, setting a respectful market value of $80 billion.
But on July 2, the Chinese government called an abrupt halt to DiDi’s business development plans (temporarily?) and directed the company to stop signing up new customers, pending its “rectification.”
By now, DiDi’s new shares have dropped more than 45%. Investors are unsettled (to say the least), and some claim it seemed like a due diligence failure of the first order, an undisclosed business-critical risk factor, emanating (predictably?) from a regulatory regime known for using some rough measures.
SPAC’s Hot Trend is Cooling Down
Another example of investors' concerns related to lack of appropriate due-diligence process is linked to the fast road to an IPO by merging with a SPAC (a blank check or Special Purchase Acquisition Company).
Unlike the relatively deep and systematic due diligence process that characterizes regular IPOs, in the case of the SPAC merge, the investors mainly trust the judgment of the SPAC executives.
Although SPACs have been around for decades, they’ve become more prevalent in recent years, attracting big-name underwriters and investors and raising a record amount of IPO money in the last couple of years. As a result, in 2020, SPACs raised $83 billion in gross proceeds from 248 counts, surpassing the record $13.6 billion raised in 2019 (from 59 IPOs).
However, recent statistics show that the SPAC’s party is over. For example, Defiance Next Gen SPAC Derived ETF (SPAK) is about 9% down from its initial price in October 2020 and 34% down from its peak in February 2020.
Another study found that out of 115 completed SPAC mergers, from 2016 to the end of 2020, 65% had declined. Accordingly, one of the reasons why LiDAR companies’ stocks are falling is mainly related to the financial vehicle they chose to go public, rather than solely to the performance of the companies.
Tesla Drops Out Radar
It’s already old news that Tesla, especially Elon Musk, claims that LiDAR isn’t required for autonomous driving. However, in the last few months, Tesla announced that starting from deliveries in May 2021, Model 3 and Model Y vehicles built for the North American market will no longer be equipped with radar but rely only on camera sensors.
Fortunately, Tesla is alone in this position. Even Mobileye, the current undisputed leader in automotive cameras, takes a different approach when it's concerned with achieving a robust and reliable autonomous driving solution in a reasonable time. Accordingly, they add a radar-LiDAR subsystem, stand-alone from the camera subsystem, to provide enhanced safety and a significantly higher mean time between failures (MTBF).
Recent multiple Tesla car crashes, while utilizing the autopilot system, are another example of the need for a whole suite of various sensors that complement each other to reach a sufficient level of functional safety. LiDAR is one of the back-bones of such a suite. Accordingly, the camera’s physical limit during nighttime or severe weather conditions, such as heavy rain or fog, must be supported by another type of sensor. For this reason, most OEMs agree that regarding the need for fusion between camera, radar, and LiDAR to reach autonomous capabilities above Level 3.
Nevertheless, many investors still flock after Tesla and the recent update of the Autopilot system, crumbling their confidence in LiDAR companies' prosperity.
What’s Next?
Despite the various reasons presented above for the recent decline in LiDAR stocks, I still believe that at least some of them will eventually flourish.
Investing in LiDAR technology is a long-term investment in future technology. Since most of the reasons detailed above are relatively short-term, the industry will overcome them.
For example, one of the leading German OEMs should soon announce a design win that will probably positively affect at least one traded company. Besides, the chip shortage will also eventually end, which will ease the situation for the OEMs, allowing them to redirect more funds to novel technologies and LiDARs among them. Also, the situation in China will settle down since the Chinese regulator understands that such unclarity isn’t healthy for the markets, while in his interest to allow the industry development. Therefore, either the market will remain bullish, or there will be some sort of correction in the short term. Still, investors won’t stay sitting on the fence and return to invest in small growth technology companies in the long run. Finally, in a few years, the performance of the companies will define the price, rather than if they went public through SPAC or not.
The broad consensus among OEMs to include LiDAR sensors in future projects on the one hand and the continuous improvement in available LiDAR systems, on the other hand, provides a high level of certainty in the relevance of this sensor and the overall future prosperity of the industry. However, similar to other new industries where you see rapidly growing demand and many companies working to fill it, consolidation will occur, eventually leaving us with a few significant players instead of tens of small companies. Accordingly, these few remaining contestants will win the jackpot, giving room for optimism.
