American lidar technology startup Ouster, Inc. (OUST) has its main office in San Francisco, California. It creates digital, high-resolution 3D lidar sensors for industrial, robotics, autonomous vehicles, drones, mapping, defense, and security applications.
What is Lidar?
- Chatbots are great, but Lidar is the key to unlocking AI’s potential in the real world. Lidar (Light Detection and Ranging) is bat echolocation but with lasers, for a precise 3D model of the surroundings.
- Humans are squishy! So autonomous machines must track their environment with 100% reliability. Cameras fail in certain lighting conditions, as seen in this Tesla dashcam.
- Ouster has honed the long-term winning type of Lidar.
Why OUST’s variant of Lidar is the future
- OUST specializes in multi-beam flash Lidar, which enjoys structural advantages in cost, compactness, durability and power efficiency. Historically, it lacked the range of legacy designs with moving parts. However, OUST has finally closed this performance gap.
- OUST’s approach uniquely benefits from advancements in the consumer electronics industry, which drives down costs while improving performance, a-la Moore’s law. See: laser printers, fiber optics, VR headsets, FaceId, fitness trackers and smart glasses.
- Ouster’s DF2 sensor has 240 meters of range and will be sold for automotive use in 2025.
A clear path to profitability
- OUST sells to customers across 15 industries, versus relying on one aspirational auto partnership. This creates stable revenue and strong pricing power, generating the cash to achieve automotive-grade performance. Their sensors already power Amazon’s latest warehouse robots.
- OUST already makes money on each LiDAR unit sold, with +29% gross margin in 1Q24. Whereas their US competitors lose money on every LiDAR unit sold (i.e., gross margins below -80%).
- Last year, they launched a complementary software product (BlueCity) with recurring, high-margin revenue. Customers love it because it reduces the time-to-value for OUST sensors.
- OUST is close to breakeven, with $4.7m in cash outflow in 1Q24 and $189m in cash reserves. So they won’t need to raise debt and dilute shareholders, unlike competitors with huge interest payments and quarters of runway left.
Attractive entry price, with insiders buying ahead of today’s earnings release
- OUST shares fell 33% since mid-July for no fundamental reason. Just the Yen carry trade unwind and terrible 2Q earnings from Lidar competitors. Like Luminar Technologies (LAZR) who reported a 22% sequential rev decline, dilutive debt restructuring, new debt with a 14% interest rate and -88% gross margins.
- Insiders doubled-down on OUST by buying shares on May 15th, halfway the quarter whose results come out later today.
- OUST guided to $110m revenue for 2024 (+40% y/y), gross margins in the mid-high 30s and profitability by year end. Given they beat guidance the past three quarters, today’s market cap of $500m may never be seen again.
Risks to thesis:
- While Hesai (HSAI), a Chinese manufacturer, enjoys higher revenue thanks to automotive contracts, their 2Q revenue declined y/y and the US military labeled them a national security risk.
- OUST lacks major automotive partnerships, which can generate huge amounts of recurring revenue upon commercialization. However, their first sensor optimized for this space, DF2, will be sold in 2025.
- A recession could slow down investments in industrial automation, delaying their path to profitability and requiring shareholder dilution. On the flip side, this would probably kill their debt-laden, negative gross margin competitors.
- Stock is up 56% YTD still! But this seems warranted given repeated revenue beats, gross margin expansion and a successful merger (Velodyne) with $120m in cost savings ahead of schedule.