Luminar Technologies Wows With >100% Revenue Forecast, But Margins In Focus

Summary

• Luminar Technologies, Inc. unveiled a lidar-powered ecosystem at Luminar Day, headlined by a forecast for revenue growth in excess of 100% each year for the next five years.
• Revenues for Luminar are projected to reach ~$1.5 billion by FY27 under that forecast, supported by a multibillion-dollar deal expansion with Mercedes.
• However, for the lidar industry to scale, production costs and sales prices will have to fall substantially to enable mass-market deployment, threatening margin growth.
• Assuming a 35% FY27 gross margin and operating expense growth of 20% from FY22 to FY27 shows Luminar Technologies, Inc. struggles to maintain profitability.

Ethan Miller

Following recent expanded partnerships with Polestar Automotive Holding UK PLC (PSNY) and a multibillion-dollar deal with Mercedes-Benz Group AG (OTCPK:MBGYY), Luminar Technologies, Inc. (NASDAQ:LAZR) unveiled the creation of a lidar-powered ecosystem at Luminar Day. It incorporated a new semiconductor subsidiary and entered into exclusive agreements in insurance products and its AI Engine. Luminar also announced a forecast to record triple-digit revenue growth each year for the next five years, supported by existing and new design wins along with the burgeoning growth of the lidar industry.

Luminar Day Highlights

One of the main highlights from Luminar Day was the unveiling of Iris+, its next-gen lidar sensor allowing for enhanced lidar performance at higher speeds - the foundation for unlocking higher levels of autonomy. Luminar also announced the acquisition of Seagate's (STX) lidar assets, and the establishment of Luminar Semiconductor, combining Black Forest Engineering, Optogration, and Freedom Photonics into a singular unit.

Also among the announcements were a new commercial deal with Pony.ai, an insurance product tie-up with Swiss Re, and the announced that its highly automated facility in Mexico is expected to come online in Q2 this year, ahead of schedule.

So what all do these announcements mean?

Luminar looks to be positioning itself to accelerate commercial deployment of its lidar in late 2023 and 2024 until the launch of Iris+ slated for 2025. Bringing the highly automated facility online can help bring lidar production costs lower, a key facet not just in Luminar's projected positive gross margin by Q4 this year, but also in the long run to enable mass-market deployment.

Mercedes Deal, And A New Factory

Prior to Luminar Day, the company announced a multibillion-dollar deal with Mercedes - while exact financial figures were not announced, the deal is Luminar's biggest, with The Verge reporting a tenfold increase in lidar volume in the deal "Luminar says is larger than all of its other OEM partnerships combined."

Mercedes is looking to equip its next generation of vehicles with Luminar's Iris/Iris+ by mid-decade, but to support a deal of this size, Luminar needs another factory, reportedly looking to Asia to establish a plant dedicated solely to Mercedes' supply.

Building and tooling a new factory from scratch will likely take 12 to 18 months at a cost of a hundred million dollars or so, should it choose to establish the plant itself, rather than utilizing partnerships such as its Mexico facility with Celestica Inc. (CLS). However, reports from Nikkei Asia suggest that Luminar "will seek to lower the cost of each sensor to $100" at the new factory -- a price point that can and likely will enable lidar-equipped vehicles to enter the mass market at major (millions of units) volume.

Triple-Digit Revenue Growth Forecast

Luminar also offered a bullish forecast for revenue growth -- the lidar maker is targeting revenue growth in excess of 100% each year through FY28. However, the nature of the lidar industry raises questions about margin maintenance, especially when combined with an end goal of lowering per-unit lidar costs to anywhere from $100 to $500.

For FY22, Luminar generated $40.7 million in revenues, about +27.5% y/y growth, driven by nearly +83% y/y product revenue growth.

For FY23, Luminar is forecasting revenue growth in excess of +100% y/y, suggesting revenues of at least $82 million -- though revenues could be as high as $105 million, depending on how quickly production can scale in Mexico and if the pace of deployments accelerates in the back half of the year. Luminar's guidance was a bit thin -- the Street had been expecting to see revenues of ~$116 million for the current fiscal, or +183% y/y.

The weaker guide is not necessarily a cause of concern, given the high-profile deal expansion with Mercedes supporting growth through mid-decade and beyond, along with numerous other commercial deployments and potential for more large-scale deals.

In the near term, the commercial launches of SAIC's Rising Auto's R7, Volvo's EX90, and Polestar 3 throughout 2023 are likely behind the weaker guide for the year, as it is hard to truly estimate from a volume standpoint where initial production for these three vehicles will reach.

Moving on to FY24 through FY27, Luminar is expected to grow revenue significantly -- modeling off a projected $90 million for FY23 places FY28 revenues between $1.44 billion and $1.58 billion, based on around +100% y/y growth each year and around +120% y/y growth, should larger deals be signed.

Off the bat, Luminar stock is already valued at about 2.2x FY27 revenues - not cheap, but not too expensive either - essentially, investors are paying a significant premium today in the hopes that this growth not only pans out, but exceeds expectations over the five-year period.

A Highly Competitive Industry

One major idea for investors to remain aware of is that the lidar industry is likely to face significant competition and consolidation as the decade progresses, as lidar advances from infancy into a full-fledged, mass market solution, driven by lower costs of production.

Luminar faces intense competition from lidar leader Hesai Group (HSAI), which shipped over 60,000 lidar units in 2022 and has already reached 10,000 units per month in volume. Innoviz Technologies Ltd. (INVZ) has earned a massive $4 billion order from VW's (OTCPK:VWAGY) Cariad unit and a deal with BMW, and Cepton, Inc. (CPTN) is working with General Motors' (GM) Ultra Cruise, for deployment later in 2023. Numerous other suppliers -- Mobileye (MBLY), Ibeo, Valeo (OTCPK:VLEEY), AEye (LIDR), Aeva (AEVA), MicroVision (MVIS), and others, are all involved in automotive lidar products.

Luminar is expecting to position itself to be gross margin positive by Q4 '23 -- this is a markedly major shift from Q4 '22, where gross margin deteriorated from -44% to -148% y/y as cost of revenues rose significantly. Luminar looks to be expecting massive economies of scale from its automated facility in Mexico in order to rein in production costs to such a degree over four quarters.

In the long run, margins remain in focus -- more specifically, Luminar's margin evolution.

This means: in order for the broader lidar industry to scale higher over the course of the decade, lidar costs must decrease significantly in order to pave the way for wide-scale, mass-market deployment that OEMs are searching for (barring any new breakthrough, such as radar or computer vision that makes lidar's perception capabilities obsolete, though that's unlikely).

From a long-run perspective, driving production costs lower to enable mass-market deployment is not margin accretive -- it may be challenging to consistently expand margins as the industry is working to reduce production costs and prices. Manufacturers like Ouster have recorded gross margins of 33%, though gross margin at scale may be limited to 45% in a highly efficient operation.

Applying a 35% terminal gross margin to Luminar's business in FY27 suggests gross profits of $504 million to $554 million, meaning that operating expenses will need to be reined in to record profits at scale. Luminar's operating expenses totaled $382 million, about +91% y/y, in FY22 -- over the period to FY27, opex growth will need to top out at ~20% to ~$450 million in order to generate $0.10 to $0.25 in EPS. Given the risks that increased competitiveness and consolidation will eat into margins, visibility into long-term profitability (and the strength of net margin) remains unclear.

Outlook

Luminar Technologies, Inc. unveiled a lidar-powered ecosystem at Luminar Day, preceding by a massive multibillion-dollar win that vaults its status among the top of the crop in lidar manufacturers. Luminar provided an optimistic long-term revenue outlook, calling for successive years of triple-digit revenue growth, but the nature of the lidar industry scaling from infancy to full-fledged commercialization threatens continual margin expansion as lidar costs fall substantially.

While an initial FY27 forecast calls for Luminar Technologies, Inc. revenues closing in on $1.5 billion, expenditure growth must be tamed to record thin profitability at a 35% gross margin, suggesting that investors are still paying a decent premium for decreased visibility in profits (36x to 90x) and a valuation at 2.2x FY27 revenues.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.