The stock market is known to be forward-looking, often valuing companies on future possibilities. However, this behavior raises the question: Where do you draw the line where banking on a company’s potential crosses over to wildly overexuberant estimates?
Looking at the case of Luminar Technologies (LAZR), Northland analyst Gus Richard believes the lidar maker’s valuation has just crossed that threshold.
Accordingly, Richard downgraded LAZR from Outperform (i.e. Buy) to Market Perform (i.e., Hold). At the same time, the analyst trimmed the price target from $41 to $38. (To watch Richard’s track record, click here)
That’s not to say Richard doesn’t like the company; the 5-star analyst still thinks Luminar “will likely be the automotive lidar leader,” and says the company has the “best technology and the cost reduction path.”
However, it is still early days, and Luminar remains a year and a half away from “volume production.”
“In our experience,” Richard notes, “There are many a slip between cup and lip, and there will likely be a better entry point. We estimate the automotive Lidar market will be $2.5B in CY25. Even with a 100% share, LAZR is trading at 5x CY25 auto lidar market size, and 17x our CY25 revenue estimate.”
Further complicating the investing thesis is the increasingly crowded lidar space. There are currently 5 companies that are public or in the process of going public via a SPAC vying for attention. Richard says investors are likely to “spread out their lidar investments.”
What’s more, the whole segment appears to be running ahead of itself. Collectively, the 5 companies command a total market cap of $24.5 billion. Richard estimates that by 2025, the total auto lidar market will be worth $2.5 billion, which means the lidar makers’ combined valuation points to a “high level of speculation around the lidar market.”
“While the combined market cap may go to 20x or 100x the market opportunity 10 years out,” Richard summed up, “There comes a point when valuation matters.”
Overall, Wall Street is torn between the bullish camp and the analysts who opt to hedge their bets on the lidar-sensor maker. Based on 5 analysts tracked in the last 3 months, 3 rate LAZR stock a Buy, while 2 say Hold. Is the stock overvalued or undervalued taking under account these analysts’ expectations? The average price target stands at $36.60 and implies nearly 14% upside.
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.