Ouster – Dire Straits.

Money for nothing and company for free.

• Falling long-term estimates and substantial dilution have materially damaged the long-term outlook for the share price but the shares have fallen so much that there is enough upside even at a greatly reduced share price forecast to consider rounding down.
• Ouster has had a rough 18 months and the combination of difficult end markets, terrible action in the stock market as well as some bad decisions by the management team have hammered the share price.
  • First, end markets: Optimism and sentiment towards lidar have taken a big hit as the general malaise that has settled over autonomous driving and technology has hurt everyone.
  • As I have said on multiple occasions, autonomous driving was greatly overhyped and is unlikely to come to market before 2028 at the earliest.
  • This has meant that many large buyers of lidars have delayed or cancelled orders which have caused estimates for lidar sales to fall hard.
  • I have long believed that Ouster is not very well suited to automotive, but critically it doesn’t have to be as the lidar market is far more than just cars.
  • Any type of industrial automation can benefit from lidar meaning that Ouster does not need automotive in order to be successful.
  • Automotive lidar seems to carry a certain cache in the industry but this makes little sense to me as a lidar out the door is the same whether it goes into a car or a forklift truck.
  • This is where we come to the first bad decision by management in my opinion as the company thinks that it does need automotive, and it made the dilutive acquisition of Sense Photonics in 2021 to help it address this market.
  • The general economic downturn thanks to higher interest rates to pay for the pandemic has meant that Ouster’s estimates for the next few years have been hit and hit hard.
  • At the time of the SPAC listing, the investment deck was forecasting $1.6bn in revenues in 2025 which given the company’s customer count and its execution on its near-term forecasts was not incredible.
  • However, looking at the merger document with Velodyne leads me to forecast just $200m in revenues in 2025, some 88% below the original expectation.
  • I don’t think that the company has lost customers just that its customers have substantially delayed industrial and automotive autonomy which in turn has had a substantial knock-on effect on Ouster.
  • The real answer is that Ouster has no more idea than anyone else when this market is going to really start to move, and it needs to survive until that time comes.
  • I suspect that the estimates that are now out there represent a pretty low hurdle and I am optimistic that they will be beaten in time.
  • Second, share dilution: When I first invested in this company, there were around 150m shares in issue but following the acquisition of Velodyne, Sense Photonics and the ATM mechanism, this number is now 350m.
  • To be fair to the company, the market situation in both its end markets and the stock market has deteriorated through no fault of the management which has resulted in the need to raise more money to make it to profitability.
  • The manner in which this was executed raises questions about judgment but I am comfortable that this is now in the past.
  • This is what I think lies behind the acquisition of Velodyne as everyone in the industry knows that its products have no real future but the company had a lot of cash.
  • Hence this should be seen as a share issue to get Velodyne’s cash as well as access to its customers.
  • I expect that its products will be quickly terminated and replaced with Ouster’s.
  • This strategy has legs, but it will take time to pull off.
  • The net result is that dilution was inevitable, but it could probably have been moderately less if the management had made better decisions at the time.
  • Third, market sentiment: which is now at rock bottom.
  • The horrible share price action has forced the company into an ignominious reverse share price split (like many other SPACs) in order to keep the share price above $1.
  • NYSE regulations require that the share price can only be below $1 for a certain period of time before the shares are subject to delisting which is why many companies have taken this route.
  • Although this action changes absolutely nothing about the company, it has been taken as a sign that the company has no idea when or if the shares will recover above $1 implying great pessimism about its own outlook.
  • I think that this is why the news has hammered the shares yet again with the stock now below $0.50.
• The sum of all of these woes is that my valuation on a DCF basis (10% WACC) of Ouster has fallen from around $8 a year ago to just $1.85 now.
• A week ago, this implied that the shares could double to reach my valuation which would leave me selling the shares at a loss with an average entry price of $2.77.
• This left me pretty uninterested in increasing my stake with better options elsewhere.
• A week is a long time and now with the same target of $1.85, the shares could triple offering me a much more attractive opportunity to round down.
• Furthermore, with around $300m in the bank, the company currently has a negative enterprise value of $111m.
• This means if I buy the shares at $0.49, I get the company for free and $0.31 of cash into the bargain.
• Obviously, that cash is all going to be burned to keep the company going until it can break even but it is a measure of the deep value that is now on offer.
• I think that the management is pretty good at executing on the opportunities that it has despite the errors in judgement that it has made.
• In these sorts of situations, this is a really big deal as execution is what is needed to get the company out of its current predicament.
• This is why I am now inclined to increase my stake materially at this price as I think the company will survive and will be a going concern in the long term.
• I am also optimistic that the horrendous 18 months that the management has endured has made it less green and less prone to repeating the mistakes that it has made.