Unknown, Undervalued: How Aeva Is Positioning Itself As A Lidar Industry Leader

Summary

• The Lidar total addressable market is expected to catapult from $4 billion in 2020 to ~$200 billion in 2030.
• Aeva's technological superiority and key partnerships offer it a clear path to be one of the industry leaders over the next decade.
• Our base case suggests Aeva stock is worth ~$22 per share, currently undervalued by 43%.

Investment Thesis

Lidar technology innovation has brought costs down dramatically over the past decade while simultaneously increasing its capabilities. Between the automotive, consumer products, industrial robotics, and security sectors, analysts expect the total Lidar market to rise from $4 billion in 2020 to ~$200 billion in 2030. While the main driver of this growth is expected to come from the autonomous vehicle sector, consumer products are beginning to use this technology, shining a light on Lidar's potential to change the way we live.

Aeva Inc. (NYSE:AEVA) created the first 4D Lidar on chip technology that solves the limitations associated with traditional 3D Lidar. The company's technological superiority and key partnerships offer it a clear path to be one of the industry leaders over the next decade.

Investing in Aeva does not come without risk. Industry competition is fierce, and competitors are investing heavily in R&D to increase innovation. As this industry is still in its early stages, technological innovation and M&A activity have the potential to disrupt the competitive environment.

Our base case suggests that Aeva stock is worth ~$22 per share, currently undervalued by 43%. Additionally, if the company can execute its lofty goals, we expect significant upside beyond these levels.

Lidar Technology

Lidar technology uses light pulse waves to determine the distance between objects around it. Instead of explaining how this works, I find that this picture explains it effectively.

Source: Velodyne Lidar

Although Lidar was developed in the 1960s, it had limited use until coupled with GPS technology to create 3D maps of surrounding areas. Today, companies use this technology in agriculture, oceanography, construction, engineering, and data collection. However, as the world continues to move more digital, Lidar technology will play an essential role in many future industries.

Addressable Markets

The largest addressable market is the autonomous vehicle sector. Lidar technology allows vehicles to navigate environments in real-time by creating 3D maps of their surrounding environment. It is a crucial technology for autonomous cars, and almost all developers use Lidar technology except for Tesla. In 2019, Elon Musk claimed that Lidar was expensive and unnecessary, although the cost has come down significantly since then. If companies continue to use Lidar in autonomous vehicles, analysts expect the total addressable market in this segment alone to be $100 billion in 2025 and $160 billion in 2030.

Lidar is also being tested with UAVs, industrial robotics, and security systems to increase accuracy and safety. It has yet to be adopted in industrial robotics and security systems due to the traditional technology's expensive and bulky nature. However, as the products' prices and size have come down, these two segments are expected to help drive demand.

Two other fast-growing segments for Lidar technology are consumer electronics and consumer health. While Android has featured infrared lasers in some of its phones, Apple's new iPhone 12 will feature true Lidar sensors that can pick up the size and volume of objects more accurately. This addition will enhance specific photo modes and allow users to create 3D designs of rooms and measure objects accurately with their phones. However, these applications are just scratching the surface of this technology's capability to transform the way we live. For example, companies are testing how Lidar can assist with surgical automation or how students can conduct virtual dissections. Other consumer electronics, such as smart glasses, are expected to experience strong demand over the next several years. There are rumors that the Apple Glasses are equipped with Lidar technology and set to hit the market sometime in 2022. Lidar might also reduce insurance costs for companies by upgrading safety systems in cars, aerial vehicles, security, and more. As the world continues to move more digital, Lidar will be a fundamental technology used in nearly all types of augmented reality.

Source: Aeva Investor Presentation

Aeva's Product

Aeva has created 4D Lidar technology while bringing size down dramatically to a single semiconductor chip. Compared with traditional Lidar products, the chip is free from interference, has 100x higher sensitivity, and measures velocity instantaneously, a first for the industry. The company also designed it on Silicon Photonics using simple processes for easier production at a mass scale. While other companies are developing Lidar on chip technology, no other company has 4D Lidar. One breakthrough of Aeva's technology was the break of the dependency between maximum range and maximum point density for Lidar. Previously, FMCW lidars generated ~150,000 points/second for every beam, five times less than ToF Lidars. Aeva's chip can measure over 2 million points per second for each beam, a first in the industry. It can measure at micrometer precision up to 300m with a low beam count and lower power needed. Aeva is focused not only on autonomous vehicles but also on consumer electronics, consumer health, industrial robotics, and security. Aeva expects to begin production of the chip in 2024. Our research found only a few companies that can compete with Aeva's technology, which we will discuss under competition.

Source: Aeva Investor Presentation

Partnerships

Aeva has secured several key partnerships to drive both demand and manufacturing scale. Aeva first partnered with Audi in April 2019 to further develop its technology before Porsche made a significant investment in the company later that year. Volkswagen, the world's largest auto manufacturer, owns both automakers. At the time, Alex Hitzinger, Senior VP of autonomous driving at VW, stated the company was hoping to use Aeva's Lidar chips for its VW ID Buzz EV, expected to launch around late 2022. In September 2020, Aeva partnered with ZF Production, a top global automotive Tier-1 supplier, to bring the chips' mass production to the auto market. Earlier this year, Aeva also partnered with Denso, the world's second-largest automotive supplier, which Toyota partially owns, to further the goal of mass adoption. Lastly, Aeva partnered with TuSimple, a company developing self-driving trucks, to help bring the trucks to market. In total, Aeva says it has partnered with 30 of the top names in the auto industry. These partnerships provide Aeva the opportunity to be a leader in the industry.

Source: Aeva Investor Presentation

Financials/Projections

Aeva expects to record small amounts of revenue over the next few years from auto development sales while forecasting sales for production vehicles to begin in 2024. Currently, the company is forecasting $286 million in 2024 revenue and $880 million in 2025 revenue. The 2025 revenue includes +$440 million from current agreements with its top four existing customers. The company projects it will reach profitability and positive free cash flow in 2024, with gross margins ~63% in 2025 and EBITDA margins rising to 39%. Due to its partnerships, the company will not have to make capital expenditures on manufacturing facilities or equipment. The company currently has no debt and received $511 million in cash from the reverse merger to fund growth opportunities.

Source: Aeva Investor Presentation

Competition/Risks

Industry competition is intense as companies look to capture market share of the autonomous vehicle segment. Rival Velodyne Lidar has produced Lidar technology since 2013, already has $100 million in revenue, and has sold its products to customers in multiple industries. The largest pure-play Lidar company, Luminar, has a market cap of just under $8 billion. The company has secured over 50 partnerships that it believes will make up a large portion of the future addressable market. However, as of now, it projects similar revenue guidance to Aeva through 2025. More so, after analyzing both company's products, we believe Aeva has superior technology. Aeva's chip can measure both color and instantaneous velocity while Luminar's cannot. Aeva's chip also has a range of 250m at 10% reflectivity, while Luminar's chip has a range of 250m at only 5% reflectivity. Likewise, Luminar is focused solely on the automotive sector, while Aeva is looking to sell its products across multiple sectors.

Many startups have launched versions of Lidar on chip technology, although Aeva's is the only one with 4D. Overall, competition is expected to stay intense as the industry grows dramatically over the next decade. Investors should keep an eye out for any technological innovation as it could significantly alter the competitive environment. As most players have access to scale through partnerships, technological differentiation will give rise to a few key players that will consolidate the industry over time.

Source: Luminar Investor Presentation

Valuation

The reverse merger transaction valued Aeva at $1.7 billion pre-money and $2.3 billion post-money. Based on the current share price of $12.48, the market cap currently sits at $2.6 billion. The company put out its own 2030 targets, obtaining a 3% market share of the total addressable market, which it projects to be ~$200 billion by that time. It projects $6 billion in revenue and $3 billion in EBITDA based on 45% projected EBITDA margins. Using a 12.0x EV/EBITDA multiple, that would value the company at $36 billion or ~$170 per share. Discounting that at a 15% discount rate would bring today's market cap to $10.2 billion or ~$48 per share. Even though this is our bull case, we believe that there is an upside from here if Aeva can become the Lidar space leader. It is far too early to guess who the leader will be, but we expect the leader to be valued north of $100 billion by 2030.

Base Case: We project the total addressable market in 2030 to be ~$150 billion. However, due to Aeva's superior technology and focus on multiple industries, we forecast that Aeva will capture 4% of the market. This assumption projects $6 billion in 2030E revenue, and with an estimated 35% EBITDA margin, $2.1 billion in EBITDA. Applying a conservation EV/EBITDA multiple of 10.0x, the company's EV would be $21 billion. Further, assuming the company had raised debt, we used an estimated debt-to-equity ratio of 0.25 to bring the market cap to $16.8 billion or $79 per share. Using a 15% required return rate brings the current market cap to $4.8 billion or $22 per share. We feel comfortable initiating a new position at the current level, which we did this week.

Conclusion

Lidar technology has the potential to transform the way we live over the next decade. Between the automotive, consumer products, and industrial sectors, analysts expect the Lidar addressable market to be ~$200 billion by 2030. Aeva's superior technology and key partnerships offer it a clear path to be among the industry leaders. However, investors should continue to monitor the competitive environment as technological innovation, or M&A activity could disrupt current forecasts. Our base case suggests that Aeva is currently 43% undervalued, with significant upside from there if it achieves its goals. We initiated a new position in the stock this week and feel that the current levels are attractive.

Analyst’s Disclosure: I am/we are long AEVA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Entered a long position in Aeva stock on April 5th, 2021.