Ouster: The Future Remains Uncertain (NYSE:OUST)

Shares of LiDAR concern Ouster, Inc. (NYSE:OUST) have rebounded by some 250% off their all-time low after cratering 98% as the much-ballyhooed autonomous vehicle revolution has yet to materialize. The company’s software should actuate further adoption of LiDAR, with analysts forecasting 41%, 51%, and 61% annual top-line growth through 2026, after only 2% (apples-to-apples) in FY23. Trading at five times FY24E sales with sub-40 gross margins and not forecasted to breakeven until FY26, the recent insider buying into this very busted IPO merited a deeper dive. An analysis follows below.

Ouster, Inc. is a San Francisco-based provider of high-resolution digital LiDAR sensors, providing environmental awareness to machinery, vehicles, robots, and fixed infrastructure assets. The company markets two hardware product lines – one of which came via its February 2023 merger with Velodyne – and two software solutions, while developing digital flash solid-state LiDAR sensors for the future world of autonomous driving. Ouster was founded in 2015 and went public in 2021, when it merged into special purpose acquisition company (SPAC) Colonnade Acquisition Corp., with its first trade post-merger transacted at $113.80 a share, after giving effect to a 1-for-10 reverse stock split in April 2023. Shares of OUST trade for around $10.75 a share, translating to an approximate market cap of just under $500 million.

LiDAR

For those unaware, LiDAR is an acronym for ‘light detection and ranging‘. It is a remote-sensing technology employing lasers to measure precise distances and movement in a designated environment in real time. When combined with artificial intelligence and other technologies, it is intended to enable autonomy for inanimate objects by providing a 3D view of their surroundings. Since inception, Ouster has focused on solutions for the automotive, industrial, robotics, and smart infrastructure verticals.

Products

OS Scanning Sensors. The company’s technology is based on two semiconductor chips: receiver ‘system on a chip’ [SOC] and vertical cavity surface emitting laser (VCSEL) array. Together, they form the foundation of Ouster’s OS product line, which includes four models featuring different ranges, fields of vision, resolutions, and data output structures. First introduced in 2018, the latest iteration of OS, known as REV7, has applications in mapping and robotics, as well as security, crowd, and retail analytics.

Velodyne Sensors. With its merger with Velodyne came three models of sensors that are designed for autonomous driving and enhanced object identification.

DF Product Line. Ouster is also developing a DF (digital flash) series of solid-state LiDAR sensors that provide precision imaging without motion blur across an entire field of view, which are devised for advanced driver assistance systems and autonomous driving. Not yet in the marketplace owing to several factors, not the least of which is the elongated timelines in the automotive world for autonomous driving, the future product line was made possible by the company’s acquisition of Sense Photonics in 2021. As for a specific launch date, management has stated that it wants to make sure that it is “building exactly the right thing” and that “it’s better to be correct than to be first”.

Software. In addition to its hardware offerings, Ouster provides two primary software platforms, including Gemini, which consists of LiDAR sensors, edge processor hardware, and perceptions software, all designed to support security and crowd analytics. The company’s other software application is Blue City, which is essentially a Gemini solution for traffic and crowd flow efficiency, urban planning, and safety.

Approach & Share Price Performance

To continue to improve its top and bottom lines, Ouster expects to cost-efficiently upgrade the performance of its sensors by moving manufacturing operations to Thailand while significantly expanding smart infrastructure software sales into other verticals to drive further LiDAR adoption. Long term, management believes it can achieve 30%-50% annual revenue growth with gross margins of 35%-40% without expanding operating expenses.

To that end, the company has lost a substantial amount of money since going public in an unsuccessful attempt to quickly expand its top line, generating Adj. EBITDA of negative $66.8 million on revenue of $33.6 million in FY21, Adj. EBITDA of negative $92.5 million on revenue of $41.0 million in FY22, and Adj. EBITDA of negative $83.8 million on revenue of $83.3 million in FY23. The top-line improvement of 103% FY23 vs FY22 is not apples-to-apples, as it includes the impact of the Velodyne merger since February 2023. If that combination had been consummated at the onset of 2022, top line growth in FY23 would only have been 2% ($86.9 million versus $85.0 million).

With all the excitement surrounding autonomous driving in 2021, expectations for any technology supporting that vertical were sky-high. As such, shares of OUST quickly achieved a post-SPAC-merger high of $149.90 in June 2021. However, as timelines for autonomous driving became tenuous and elongated, Ouster became subject to significant downward earnings revisions in the out years. For example, in Q4’22, Street consensus for FY26E non-GAAP EPS was $3.20. Just prior to the Ouster’s Q1’24 financial report, those expectations had plummeted to a loss of $0.93. Factor in multiple compression as the market about-faced from high-growth, no-profit names after the advent of inflation, and a perfect storm was at hand, cratering shares of OUST 98% to $3.21 by April 2023. Its stock has risen some 250% since, partially aided by its most recent financial report.

Q1’24 Financials & Outlook

The company’s delivered a record quarter on May 9, 2024, posting a Q1’24 loss of $0.55 a share (GAAP) and Adj. EBITDA of negative $11.7 million on revenue of $25.9 million, versus a loss of $2.65 a share (non-GAAP) and Adj. EBITDA of negative $26.9 million on revenue of $17.2 million, representing a 51% increase on the top line. The record quarterly top line was accompanied by a best-ever shipment of 4,500+ sensors. However, adjusting for the Velodyne merger, top-line growth dropped to a still solid 24%. The non-GAAP Q1’23 bottom line included the backing out of a $99.4 million impairment charge.

Ouster’s manufacturing transition to third parties in Thailand paid dividends, with Q1’24 non-GAAP gross margin reaching a record 36%, up from 25% in the prior year period.

As for Q2’24, management projected a revenue range of $26 million to $28 million.

Balance Sheet & Analyst Commentary

As of March 31, 2024, Ouster held unrestricted cash and equivalents of $187.8 million against debt of $44 million, which after burning through cash from operating activities of $137.9 million in FY23, suggests another capital raise at some point in the next twelve months. In the meantime, the company utilizes an ATM facility, from which it raised net proceeds of $3.5 million in Q1’24.

Street analysts lean slightly positive on Ouster’s prospects, featuring four buy ratings against two holds and a median price objective of $11.50. On average, they expect the company to lose $2.31 a share (non-GAAP) on revenue of $116.6 million in FY24 (up 41% over FY23), followed by a loss of $2.04 a share (non-GAAP) on revenue of $176.5 million in FY25, representing a 51% increase at the top line.

CEO & Founder Angus Pacala (16,000 shares at $12.33), Chief Technology Officer Mark Frichtl (8,000 shares at $12.34), and board member Virgina Boulet (10,000 shares at $12.20, and 20,000 shares over the last week) are bullish, based on their recent purchases.

Verdict

Even though the Street is projecting significant future growth for Ouster in anticipation of autonomous driving solutions become a reality, attempting to forecast if and when this paradigm occurs – not to mention the level of adoption these vehicles will engender – is challenging. It is also difficult to gauge the company’s market share in the rollout if and when it occurs.

That said, having rebounded approximately 250% off its April 2023 all-time low, shares of OUST are trading at 4.2 times FY24E revenue. That is an ambitious valuation for a company that has never demonstrated prolonged and meaningful organic growth, has a stated non-GAAP gross margin goal of 35%-40%, and is nowhere near profitability. At this price, there are too many uncertainties concerning Ouster to make it investible.