From Concept to Highway.
One of my favorite historical periods has always been The Gilded Age, and as I sat down to write this month's issue, I couldn't help but draw parallels between that transformative era and today’s automotive industry. The Gilded Age, which followed the Civil War, was a time of profound economic growth and technological innovation in the United States. It introduced the world to life-changing advancements such as the telephone, electric light bulb, and the early automobiles that dramatically reshaped everyday life.
Today, we are at the threshold of a similar transformation in the automobile industry. It’s not just about faster cars or sleeker designs; it's about making driving safer and pushing towards the frontier of autonomous vehicles. The roads and highways are set to become safer as vehicles not only transport passengers but actively prevent accidents with increasingly sophisticated technology.
In this issue, we delve into a technology that has moved from concept to production, signaling a shift as significant as the industrial leaps of the Gilded Age. This isn’t just a passing trend; it's a megatrend with the potential to redefine our relationship with vehicles. I'm excited to explore this opportunity, not just as an observer but as an active participant in what could be the automotive industry's own Gilded Age.
Join me as we explore how this technology is already making its way into production vehicles and why now might be the perfect time to consider investing in a future where cars do much more than drive—they save lives.
A New Era Begins.
The journey of automobile safety has been marked by continuous innovation. It began with the introduction of the three-point seatbelt, a simple yet revolutionary device that has saved countless lives. This was followed by the advent of airbags, providing crucial protection in collisions. As technology advanced, we saw the introduction of blind spot warnings, and automatic braking assist, each adding a layer of safety for drivers and passengers alike.
Today, we are stepping into a new era where LiDAR technology promises to take automotive safety to unprecedented heights. Unlike traditional cameras, which can struggle in poor lighting and adverse weather conditions, LiDAR provides precise, real-time data about the vehicle's surroundings. This allows for more accurate detection of obstacles and better decision-making by advanced driver-assistance systems (ADAS).
LiDAR will initially make its way into our lives by becoming a standard feature in vehicles, enhancing driver assistance and significantly reducing accidents. As this technology becomes more integrated, it will pave the way for full automobile autonomy, where vehicles can navigate complex environments independently. This shift will not only revolutionize our driving experience but also set new standards for safety and efficiency on the roads.
Understanding LiDAR
LiDAR stands for Light Detection and Ranging. It works by emitting laser pulses that bounce off objects and return to the sensor, creating a detailed 3D map of the environment. Unlike cameras and radar, LiDAR provides precise three dimensional sight in all lighting conditions, including blinding light and at night. This technology can measure distances with high accuracy, detect the shape and size of objects, and perform well in low-light conditions, making it an ideal solution for automotive safety applications.
The integration of LiDAR into automobiles is not a far-off concept; it's happening now. The Volvo EX90 is the first global production consumer vehicle to feature long-range LiDAR as a standard component. This groundbreaking move by Volvo signals the beginning of a new era in which LiDAR technology will become a standard feature in every car, significantly enhancing safety and driving efficiency. Volvo has always prioritized driver safety, and this latest innovation continues their long-standing tradition of leading the industry in safety advancements.
Investing in the LiDAR Megatrend
How do we invest in this transformative LiDAR megatrend? One approach would be to invest directly in automakers. However, I don't find that strategy appealing. The automotive industry requires heavy capital expenditures, extensive factories, and a large labor force, making it a capital-intensive business. Instead, as I've mentioned in previous issues, I prefer to invest in the "picks and shovels" businesses—those that provide the essential tools and technologies enabling these advancements. I also like to invest in asset-light businesses that can scale efficiently without the burden of significant physical infrastructure.
Luminar Technologies (LAZR:NASDAQ) stands out as the obvious choice. They are the only LiDAR company that has reached start of production (SOP), marking a significant milestone in bringing their product to mass production. Luminar is light years ahead of the competition in terms of getting their technology integrated into consumer vehicles. Their strategic partnerships with major companies, such as Volvo, Nissan, Mercedez Benz, Polestar, Mobileye and Nvidia position them as a leader in this emerging field.
The Volvo EX90 launch will mark the first time Luminar's multi-billion-dollar order book will begin to materially convert into revenue, initiating a series of consumer vehicle launches over the next few years. Luminar expects to ship multiple times more product in the second half of 2024 than in their prior 10 years combined, with acceleration continuing from there. This milestone is the result of a long-term collaboration with Volvo, which began in 2017. Now, Luminar's LiDAR sensors are making their way into mass-market vehicles as a standard safety feature, significantly enhancing automotive safety for drivers, other vehicles, and pedestrians. Compared to current camera and radar ADAS, LiDAR represents a significant leap forward in safety. I believe we will see an acceleration in the adoption of LiDAR across the automotive industry, paving the way for full highway autonomy.
The beauty of Luminar's LiDAR sensors is that they are powertrain agnostic. Their product can be installed in internal combustion engines (ICE), EVs, and Hybrids. This flexibility creates a significant opportunity for the company, allowing them to cater to a wide range of vehicles across the automotive spectrum. Additionally, commercial vehicles present a massive market opportunity for Luminar. The potential for their technology in trucks, buses, and other commercial applications cannot be overstated.
Adding to this, there is a substantial regulatory tailwind for the company. In May 2024, the National Highway Traffic Safety Administration (NHTSA) published the Final Rule adopting new Federal Motor Safety Standard No. 127. This rule mandates advanced higher-speed, no-contact Automatic Emergency Braking (AEB), including no-contact Pedestrian AEB (PAEB), systems on new cars and light trucks. All new vehicles must comply by 2029 with all requirements, with most requirements becoming mandated in 2028. These stringent safety standards will be challenging to meet without incorporating LiDAR technology, positioning Luminar favorably in the market.
Looking ahead, four key drivers are set to propel the demand for Luminar's products. First,the regulatory mandate from NHTSA for advanced AEB systems will be a crucial catalyst for the standardization of long-range LiDAR. Second,there is an increasing consumer demand for safer vehicles, which will only grow as awareness of Luminar-equipped vehicles spreads. Third,the natural adoption cycle of new technologies by automakers will see these advanced safety features starting in high-end models and gradually trickling down to mainstream vehicles. Finally,the total cost of ownership savings, driven by reduced accidents and lower insurance costs, will make LiDAR an essential component for future vehicles. These factors collectively ensure that Luminar is well-positioned to dominate the LiDAR market as it becomes a standard in vehicle safety and autonomy.
Entering a new growth phase.
Luminar's journey from developing groundbreaking technology to meeting global production standards, and now reaching start of production (SOP) has been a formidable task. The billion-dollar R&D investments from the chip level up have paid off, establishing Luminar as a leader in the LiDAR industry. However, the business model and cost structure that brought them to this point are no longer suited for the company's evolving needs.
As announced in their Q4'23 earnings report, Luminar's highest priority was achieving SOP with Volvo, which has now been accomplished. Following this milestone, the company has implemented cost reduction efforts to streamline operations, accelerate product development, and hasten the path to profitability. Part of this strategy includes a 20% reduction in workforce, a difficult but necessary decision to eliminate redundancies and ensure a leaner structure. This restructuring is expected to result in annual savings of approximately $80 million. Beyond workforce reductions, Luminar is expanding partnerships with third parties to offload costs, accelerating industrialization, and optimizing their footprint in low-cost countries like India.
Luminar’s focus on cost-cutting and efficiency improvements is crucial for its future success. The company aims to reduce sensor production costs and roll off launch-related expenses over the next few quarters. By expanding partnerships and strategically realigning resources, Luminar is positioning itself to scale more efficiently and cost-effectively. These efforts are designed to ensure that Luminar can quickly adapt and thrive in the competitive landscape of automotive safety and autonomous driving technology, paving the way towards sustained profitability and market leadership.
In conjunction with these restructuring efforts, Luminar has also launched its next-generation LiDAR sensor, Luminar Halo. This new product represents a significant leap forward in performance, integration, and cost-efficiency. Building on the high-performance 1550nm architecture of its predecessor, the Halo sensor boasts a 4x improvement in performance, a 3x reduction in size, and a 2x increase in thermal efficiency, all while more than doubling its cost-effectiveness. Designed for mass adoption, the Halo sensor is not only more affordable but also more versatile, seamlessly integrating into various vehicle types. This makes high-performance LiDAR technology accessible beyond just the ultra-premium market, positioning it for widespread adoption across mainstream consumer vehicles and fulfilling upcoming regulatory requirements. The introduction of Luminar Halo underscores the company’s commitment to driving the next wave of vehicle safety and autonomy, ensuring that their innovative technology continues to set the industry standard.
Could Luminar stock be a 10-bagger?
I'm genuinely excited about the opportunity to invest in Luminar right now. The future looks promising, and at its current price of around $1.70 per share, the stock is trading at its lowest since the IPO in 2020, and a significant drop from its 2021 peak of $37 per share. However, this investment does come with risks. Luminar is still a relatively small company with about $210 million in cash, $616 million in debt, and last quarter saw cash outflows of roughly $82 million. Despite these challenges, I believe in the potential of Luminar and am willing to accept the risks to bet on the company's future success.
Looking ahead, Luminar has reiterated its financial guidance for the rest of 2024. The company expects to achieve a quarterly revenue run rate in the mid-$30 million range in the second half of the year, driven by the production ramp with Volvo. This strong growth in sensor sales and revenue is anticipated as production scales up. Luminar also expects to end FY’24 with more than $150 million in cash and liquidity, bolstered by a $50 million credit line obtained in Q1’24. While Q2’24 revenue might be lower than Q1 due to the completion of current work phases for two non-series production customer contracts, the company anticipates improvement in cash flow from reduced working capital investment and early returns on cost-saving measures. The production revenue for Volvo in Q2 is expected to be modest as they begin their ramp, but Luminar's strategic cost-cutting initiatives are set to improve overall financial health moving forward.
While there are inherent risks involved with investing in a smaller company like Luminar, the potential for significant rewards is compelling. This opportunity presents a classic asymmetric bet, where investing a modest amount could potentially return multiples of the initial stake. However, it's crucial to undertake diligent research and invest responsibly, understanding the risks involved.
Portfolio Update
As we close out the second quarter, the markets are still riding high, but there's a sense that the buzz around NVIDIA might be settling down. I'm on the lookout for signs of profit-taking and possibly the onset of a bear market this summer. My strategy is all about being ready for whatever comes next. My portfolio is cash-heavy right now, and my list of potential U.S. stock picks is getting longer by the day. However, being Canadian, it’s crucial for me to also keep an eye on opportunities closer to home, especially since most of my funds are in Canadian dollars.
Finding reliable research can be a challenge with my schedule, so I lean heavily on newsletters. I recently stumbled upon a fantastic resource for Canadian investors—the 'Canadian Dividend Investor' by Nelson Smith. It's packed with valuable insights on dividend stocks, ideal for fleshing out a Canadian-focused watchlist. I've just subscribed and am thoroughly impressed with the quality of information, which will be invaluable in strategizing for the next market downturn.
While I await the opportunity of a lifetime, I’ll continue to engage with insightful reading materials and let my cash reserves work for me, earning a steady income. Until then, happy investing to all!
If you're interested in Nelson's newsletter you can check it out at canadiandividendinvesting.com
Below, you'll find a detailed table outlining the portfolio's composition as of June 5th 2024. Cash and GICs continue to make up the bulk of the portfolio, offering a solid foundation and ensuring that the portfolio remains robust amidst uncertainty.
Portfolio Composition
| As of June 5th 2024 | |
|---|---|
| Category | Portfolio Weight |
| Cash and GICs | 92.85% |
| Speculative Picks | 1.60% |
| Defensive Picks | 4.43% |
| Crypto | 1.12% |
| TOTAL | 100% |
Remember that the content of this newsletter is neither a stock recommendation nor investment advice. This is just something to consider. You can access my watchlist and portfolio through the link below. By clicking the link below you accept all responsibility for any potential losses that might result from buying any of the stocks mentioned in this newsletter.