Ouster, Inc. (NYSE:OUST) has delivered record results for yet another record quarter. The company stands out among smoldering ruins of broken promises and poor deliveries made by other Lidar companies, but sometimes, the predictability of logic does not work. Despite the fantastic results in the background of the other mediocre outcomes, Ouster was sold quoting weak guidance.
I will explain the root cause and review it. Before I delve into the details, I want to start by stating that my recommendation of $23 per share for 2025 will remain unchanged. I will explain why I hold this stance and leave it to the readers to decide if the conviction call meets their expectations.
So, how was the Q2 for Ouster? It was a record result in many categories. It had a record revenue of $26.99M, which did not meet an expectation of $27.03M. Yes, the selloff narrative included a $40K miss. Then, the company guided what is now becoming an expectation between $27 to $29M, leaning the forecast toward $28M. So, a sequential steady rise of $1M was the problem for the market, which entirely ignored and made no analysis of what Ouster told about an annual range of 30% to 50%.
To expand that thought, I assume that Q4 will have $29M in revenue. With that in mind, the second half of the year will produce $57M in revenue, totaling just above $110.3M for a year. That is 32% growth, a lower end of the range but within it.
The company emphasized that growth is there, quoting Mark Weiswig, the CFO of Ouster:
“So Richard, I’ll go first just because I want to make sure that I don’t, that any words I said are not mischaracterized at all. So what my comments were is that we do anticipate steady sequential revenue growth for the remainder of the year. And as Angus mentioned, we are going to grow. We are continuing to grow. It’s our focus to grow. We’ve got a very strong book of business. And you should expect that we are going to grow within the framework that we put together, which is the 35% to 50% annual revenue growth:
CEO Angus Pacala repeatedly said that the company is growing. However, when you tell the market that you have softness moving to the right, as in pushing sales, and then repeat that in opening remarks, you may be taken out of context in other areas. And I think that is the situation.
That consensus had $116M for 2024 as late as August 12th, which drove the share price to a 52-week high of $16.88 on July 14th. Reducing it by $6M or 5% took the stock to $7.57 on the morning of August 15th, a 54% drop, and on a day just after the release, down by 28% from $10.88. Was that all reasonable? I do not think so.
In comparison, Luminar Technologies, Inc. (LAZR) reduced its revenue expectation quarter over quarter for the annual guidance by 31% to $74.5M from $107.5M. The stock sold for more than 37% the day after the news release, but my explanation here gives enough reason for Luminar to sell off more. Since the stock has recovered, despite an absolute necessity to dilute shareholders, and all without visibility to a factor such as positive cash flow, never mind profitability.
Frankly, Luminar has yet to clearly answer how many sensors it sells per quarter or what gross margins it will produce based on its supply chain. And the company is in a financial crisis starting with $342M of negative equity, $200M in interest payable, produced by $374M debt with 12% interest range average for the nest 5 years, and $203M in convertible debt payable by the end of 2026. Amazingly, Luminar has a larger market capitalization than Ouster, facing no less than 150M shares to sell under ATM to see the end of 2025 financially.
Ouster sold equity, of course, since, like everyone in the industry, it relies on cash via equity. It did in the amount of about 3% of it in Q2, and I suspect they did it in Q3. Yet on August 12th, a day before the conference call, the company paid $45M of its total debt, including interest. So, $15.7M of equity sold helped clear the path to removing the $52M of collateral that UBS held in the account in their custody for lending $44M. A vestige of the ex-CFO getting a loan from Hercules which made even less sense with collateral of $60M and the interest rate of 19%.
So, paying the loan changed nothing regarding the amount of accessible cash, but more so changed the look of the balance sheet presentation, which is, frankly, a show of strength to the vendors and, one would think, the market. And perhaps somewhere down the road, opening a door for serious debt financing when the company will drive development of DF into a mass production.
However, there is a distinctive difference between Luminar and Ouster in selling ATM equity, not just because payout of a debt. That difference is the presence of gross margin and the gross profit, avenues to replace the equity selling with operating cash flows.
The gross margin of 34%, the first half of the year’s 31% gross margin, and finally, the non-GAAP margin of 40%, all records, cannot be duplicated with a negative 64% gross margin by Luminar. That means that Ouster has real money in the form of gross profit. That reduces the still-needed cash consumption, which was $27M in H1 2024, the lowest out of all companies, and using Luminar’s $158M as an example, miles apart from each other.
I have been a long-term investor in Ouster for some time. I was a buyer of the selloff on the 14th. How one would not be, especially if offering the $23 share price target.
My thesis for the target is based on Ouster’s visibility in reaching any company’s most essential targets: achieving a positive cash flow state and eventual profitability.
How does this shape Ouster, a lone player among Lidar companies?
When can I see Ouster be cash flow positive?
During the H1 2024, the non-GAAP EBITDA was a loss of $22.3M, which was already offset by $16.5M in gross profit. That is $39M in gross profit per half a year, so Ouster can look at something apart from money in their pocket when their gross profit reaches $78M for a year. Assuming a 37.5% gross margin as a gauge requires only $208M, and 2026 is the year to get there if we hold the estimated $233M to fact.
To be profitable, Ouster needs to offset the net loss of $47.5M. At $95M for a year and the same 37.5% gross margin, the revenue required is $254M. That means Ouster, could be profitable in 2026 if they have more revenue than analysts currently predict. That number was $283M just on August 12th.
10Q shows that the company had 48.3M shares outstanding on August 9th. They had 47.3M at the end of Q2, which included the sale of an ATM for $15.7M. The ATM available was $98M, and now adjusted cash for debt sold is $141M. Ouster has plenty of money to glide into a cash flow positive state and profitability with what became a new fashion for LIDAR companies to present itself as cash plenty with unsold ATMs. In this case, it has $239M of cash, while it needs $160M to get there.
After the selloff, the current market cap at $8.05 per share is $388M. Price to-sales ratio is 3.53. If I use $153M expected for 2025, it gives me $10.97, but why would I use 3.5 when I expect Ouster to be cash flow positive and profitable by 2026? I will use 7, and that gets me to $21.73. However, my horizon is now on deliverables of 2026, and that is $33.6, so I think it relatively easy to see that the $23 price target not only makes sense, but it is a bottom of the range, no pun intended.
The selloff on August 14th makes little sense in light of the future. The company is wholly ignored by a minimalist view of analysts, who continue to sigh when looking toward Luminar. Nobody out there can deliver what they promised in the past, except Ouster. Their hardware journey has taped out the Chronos chip, and the L4 chip is being tested. Traditionally, Q3 is when the company makes new product announcements, so I expect actual products, not mockups, drawings, and empty shells offered to customers. Their software business has attached sales across 1/3 of the revenue. Those products do not need long adoption cycles, and revenue growth can outpace the conservative view of the company.
Thus, it is the only company I rate as a strong buy, and the only one in the buy category. Aeva (AEVA) because it has ample cash and is cheap enough, is a hold; everyone else is a sell, and I rate Luminar as a strong sell. I also dropped the analysis of Aeye (LIDR) and Cepton (CPTN), first for not being a real contender and second because Koito took them out. For long-term investors, Ouster remains the only option in Lidar that offers positive cash flow within two years.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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