Revisiting Ouster Stock After the Velodyne Merger

One sure sign that we’re in the midst of a market rally is that Nanalyze subscriptions are selling like hotcakes. While that’s partly thanks to the popularity of our Nanalyze YouTube channel, retail investors are more likely to invest in trustworthy investment tools when the market is hot rather than when it is not. Of course, the recovery has been uneven among tech stocks, particularly ones that went public through special purpose acquisition companies (SPACs). For instance, just 3% of the nearly 200 companies that merged with blank-check firms in 2021 are trading above their original $10 price, according to Renaissance Capital (via Fortune). 

While SPACs opened up entire technology sectors like NewSpace to retail investors, few retail investors have benefited from these deals. As we discussed at the end of last year, space stocks have crashed hard. SPAC mergers also helped launch eight different LiDAR stocks into the public markets in just a couple of years, with predictable results:

March 25, 2022 was the last time we checked in with all of these LiDAR stocks. You can see that they have not fared so well in the last 15 months. Quanergy has been delisted from the NYSE. AEye, Aeva Technologies, and Cepton all appear to be heading in the same direction. Velodyne was acquired (for some reason) by Ouster, the one LiDAR company that we actually kind of liked due to its diversified and growing revenue. At first glance, it appears that Ouster stock bucked the trend and gained a bit of value. Instead, the company did a 1-10 reverse stock split in April to keep its share price out of the delisting danger zone. Since completing the Velodyne merger on Feb. 10, the stock has lost 65% of its value and forced the company to write off nearly $100 million of goodwill because its market capitalization had fallen so low. Let’s take a closer look at Ouster stock.

Ouster Merges Old and New LiDAR Tech

A quick refresher: LiDAR is a high-tech scanning technique that uses lasers for determining distances by measuring the time it takes for reflected light to return to the sensor. The technology has been around since the 1960s but it has become more ubiquitous as the sensors grow ever more sophisticated and cheaper over time. Applications include autonomous driving, robotics, mapping – basically anything involving navigation. 

Founded in 2015, Ouster has developed a digital LiDAR platform that replaces the hundreds of moving parts in a conventional analog laser system with a silicon chip-based system. Unlike most of the competition (at least what’s left of it), Ouster derives less than half of its revenues from automotive applications. In fact, 60% of Q1-2023 orders came from industrial and robotics customers. The San Francisco-based company is also pushing hard into smart infrastructure – think traffic management and security – and recently released the Gemini perception platform for spatial intelligence that detects, classifies, and tracks objects with centimeter-level accuracy.

Velodyne, on the other hand, is (or was) a 40-year-old company that started in acoustics engineering, specializing in subwoofer design and production. It began developing the first LiDAR systems for some of the first autonomous cars nearly 20 years ago for DARPA, the shadowy government agency responsible for helping create everything from GPS to the Internet. Along the way, Velodyne snagged contracts with big automakers like Ford and Mercedes-Benz. By the time the company completed its SPAC merger in 2020, the hype had become hysterical – but the financials turned out to be the real joke. In its last reported quarter as an independent, publicly traded company, Velodyne’s year-over-year revenues were down more than 60%. The company was spending $2 for every $1 in revenue – a gross margin of -100%. Something needed to change.

The Ouster and Velodyne Merger

The business combination between Ouser and Velodyne earlier this year was billed as a merger of equals – but you can see which name is on the marquee. Nominally, the two companies joined forces to “drive significant value creation and result in a strong financial position through robust product offerings, increased operational efficiencies, ​​and a complementary customer base in fast-growing end-markets.” In other words, both companies faced long-term existential threats to their respective businesses and figured they might be able to survive by combining what was left of their SPAC hoards.

Management says it will take the rest of the year to suss out the synergies from the merger, so we probably won’t get a true picture of the financials until the company files the 2023 year-end 10K. However, the new and improved Ouster already reported $50 million in cost savings in Q1-2023 against the stand-alone cost structures of the two companies as of Q3-2022. Some of that synergy savings included laying off about 190 people. The company expects annualized merger cost synergies of $80 million to $85 million. That sounds pretty good until you realize that annualized losses between the two firms based on the Q3-2022 baseline comes out to more than $300 million. The company has about $250 million and change in cash and cash equivalents (more on that below).

The newly combined company reported revenue of $17.2 million in Q1-2023, which included $6.4 million from Velodyne product sales since the merger closed on Feb. 10. Depending on your perspective, gross margins were either really, really bad (old Ouster) or not as bad as they used to be (Velodyne) at -2%. The plan to bring production costs under control is to outsource manufacturing of all Velodyne sensors to Thailand. Hopefully, it comes with a happy ending.

Should You Buy Ouster Stock?

How this ends for Ouster is anyone’s guess. The company should easily be able to meet its 2022 revenue projections of $65 million – better late than never – based on Q2-2023 guidance of between $18 million and $20 million in revenue. Sales of Ouster’s new REV7 sensors, powered by the company’s next-generation L3 chip, is expected to be a key driver of sales this year. In Q1-2023, Ouster shipped the REV7 to more than 110 customers, including warehouse automation companies (such as Cyngn, a firm of dubious quality), as well as large industrial trucking, bus and mining equipment OEMs. The biggest win that Velodyne brings to the new marriage is a contract to supply LiDAR systems to Motional, a joint venture to develop autonomous vehicles between Hyundai and Aptiv, an automotive technology supplier.

Ouster appears to be on track to hit $100 million in annual revenue sooner rather than later thanks to the combined business, which has about 850 customers. Unfortunately, based on the burn rate and despite synergies (i.e., layoffs), the company also appears to be on track to run out of money sooner rather than later as well. Q1-2023 losses totaled $177 million, though $99 million is that non-cash goodwill impairment we noted earlier. Management also said losses were related to costs associated with the Velodyne merger (but what about those cost synergies?). Regardless, you don’t need a PhD in math to realize that the money will run out as soon as this fiscal year. That means adding to about $40 million in existing debt and/or potentially diluting shareholders by issuing more common stock. Either prospect could be a hard sell.

Legal tussles amplify cash flow problems, as Ouster is now engaged in a patent spat with Hesai (HSAI), a Chinese lidar manufacturer that IPO’d in the United States a day before the Ouster and Velodyne merger was completed. The U.S. International Trade Commission is investigating allegations that Hesai integrated Ouster-like digital LiDAR tech into its sensor manufactured in Shanghai. Hesai made a moderate splash on its first day of trading, but the stock is already down about 50% since its Feb. 9 debut. However, with Q1-2023 revenues of more than $62 million, Hesai is making nearly as much per quarter as all of the other LiDAR companies combined. This could further muddle the sector and put pressure on Ouster stock.

Conclusion

We can’t think of too many scenarios where investing in any LiDAR stock is a good idea. Ouster stock seemed the best of the bunch, but the merger with Velodyne has exposed weaknesses in the overall business. It’s tough to get ahead in an industry where the business model is predicated on reducing costs to customers and hoping to make up the difference by scaling sales. The fact that Ouster has about 850 customers, but none account for more than 10% of revenues, suggests that most of these are pretty small accounts. (Yet three customers currently represent more than 50% of accounts receivable, which itself seems a bit worrisome.) Competition from China in the form of Hesai will only make it that much harder to make progress. 

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