Buy Innoviz Stock For Lidar Market Leader With Significant Upside (NASDAQ:INVZ)

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Aerial Drone Shot: Autonomous Self Driving Cars Moving Through City.  Concept: Artificial Intelligence Scans Surrounding Environment, Detecting Cars, Pedestrians, Avoids Traffic Jams and Drives Safely.

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I have been following Innoviz (NASDAQ:INVZ) for some time and have been contemplating my views on the stock. However, with the recent happenings and wins at Innoviz, I am increasingly seeing Innoviz as amongst the market leaders in lidar and well positioned to grow within the Advanced Driver Assistance Systems (ADAS) and Autonomous Vehicles (AV) industry.

Investment thesis

Overview

For those unfamiliar with Innoviz, the company is a market leader in solid state lidar sensors as well as perception software. These lidar sensors are high performance sensors that provide the eyes to automotive applications, as well as many other use cases like robotics, drones, mapping etc. Thus, the company’s offerings bring autonomy in a safe manner.

Innoviz started off offering the InnovizOne, its first generation lidar sensor and in 2021, released InnovizTwo, its next generation lidar sensor and also its perception software that complements Innoviz’s hardware.

Innoviz is led by founder and CEO, Omer Keilaf who is an Israeli. The company is founded in January of 2016 in Israel. Furthermore, since founding, Innoviz has received financial backing from both financial and strategic investors and partners, like Aptiv, Magna, Vertex Ventures, SoftBank Ventures Asia, just to name a few.

Biggest design win

One of the biggest and most positive news for Innoviz was the recent announcement made on May 2, 2022 before the market open. Innoviz announced that it was selected to be a direct lidar supplier for one of the world’s largest vehicle groups across multiple brands. It was also announced that this agreement will increase the company’s order book by $4 billion. This is very significant given that the total order book prior to this announcement was $2.6 billion, and thus the total new order book to date will be $6.6 billion, representing at 154% increase in the order book.

In terms of market rumors as to which vehicle group this could be, Volkswagen Group (OTCPK:VWAGY) is the likely company that Innoviz could be working with to supply its next generation cars with lidar sensors. Volkswagen is a material opportunity for Innoviz given that it is one of the largest automotive companies in the world.

The fact that Innoviz has been chosen to be a direct lidar supplier of one of the world’s largest automotive companies is one of the key compelling reasons that my confidence in Innoviz and its products are increasing. Also, I think that this actually sets Innoviz well for future commercial wins given that the company’s lidar offering is able to meet the high standards of one of the largest automotive companies in the world. Taken together, I am of the view that Innoviz is gradually on its way to be one of the market leaders in lidar and will continue to grow along with the ADAS and AV industry.

Growing quality order book and pipeline

With the announcement made on May 2, 2022, about the production win with a large global across multiple brands, Innoviz will be supplying its InnovizTwo lidar hardware and perception software solutions to the OEM. This major design win is the third major design win, adding $4 billion to the order book, as mentioned earlier. This is also a first major design win for the InnovizTwo, Innoviz’s next generation lidar with dramatically improved performance and cost, as elaborated below.

This third major design win comes after the BMW win which brings $2 billion to the order book, and the autonomous shuttle win which adds $600 million to the order book. BMW has been a partner with Innoviz for almost 4 years now, after announcing in 2018 that it has chosen Innoviz to supply the company with lidar for its upcoming AV platforms. This was one of the first indications of the future successes to come for Innoviz as it was one of the first design contracts in the automotive industry for a solid state lidar. The design win for the shuttle program with a tier 1 automotive supplier further shows increasing use case for Innoviz for shuttle programs as it will be used in airports, campuses and local public transport by the end of 2022.

With the announcement made recently, Innoviz has met its 2022 target of growing its order book by at least 40% and achieving an automotive agreement in 2022. The company expects 10 pre-production programs in 2022 and currently has 12 RFIs and RFQs in various stages of discussions. This pipeline represents a robust sales funnel and in my view, this could increase materially in the future with the recent big design win and along with the superior InnovizTwo offering.

Strong market position

With the latest design win for Innoviz, along with the BMW and shuttle wins mentioned earlier, I am of the view that we are starting to see Innoviz emerge as one of the market leaders in lidar.

This is consistent with the order book we are seeing from Innoviz relative to peers. Currently, with the new design win announced, Innoviz has an order book of about $6.6 billion. Luminar technologies (LAZR) currently has an order book of $2.1 billion, last I checked as of 31 December 2021. Luminar also expects to grow the order book by 40% year on year in 2022, which implies it could bring its order book up to $3 billion by the end of 2022. Velodyne (VLDR), another lidar contender having $800 million in revenue that has been signed through 2025, with another pipeline not yet signed of $4.2 billion.

Thus, with its $6.6 billion in order book with the latest design win, this puts Innoviz in a very solid market position, in my view. This has implications for future design wins as well, as other automotive players and OEMs will increasingly look to the market leaders in lidar to be the key suppliers of lidar for their AV platforms. Furthermore, this also shows the quality of the current offerings of Innoviz relative to peers in the industry.

As such, I think that Innoviz is not just well positioned in the market, but it is also well positioned to grow faster than average in the industry with its superior product offerings.

Superior product offering

This is an exciting time for Innoviz as it continues to innovate and bring better products to the table. Its next generation InnovizTwo lidar is just that. The InnovizTwo lidar has a 30 times performance improvement over the InnovizOne and 70% cost reduction when compared to the InnovizOne. Based on my last checks with the company, Innoviz expects to start selling the first InnovizTwo samples in the third quarter of 2022.

InnovizTwo superior offering

InnovizTwo superior offering (Innoviz)

Furthermore, Innoviz has an advantage in its technology over peers, as seen low, indicating that Innoviz is able to achieve more with less.

Innoviz peer comparison

Innoviz peer comparison (Innoviz)

Achieving scale needed for success

I think the key point for the Innoviz announcement of the new design win on May 2 is that this latest design win can help Innoviz to reach the scale necessary to achieve a better cost structure and subsequently, offer more competitive prices and also grow the business further .

I am of the view that the lidar industry needs to gain scale for it to be cost competitive as a business model. So far, many companies have failed to achieve this cost level needed to support high volume. That said, for Innoviz, this significant design win will provide the incremental volumes needed to achieve better cost structure on both the manufacturing and the procurement front, and thus ultimately, better unit economics for the company, and with that, better prices for the customers. . As evident, this is a reinforcing cycle that makes the market leaders grow faster and more competitively than those unable to achieve sufficient scale.

Furthermore, this new design win positions Innoviz well for continued commercial success, given that the company’s technology has been selected by multiple auto OEMs, including a rigorous audit to serve as a tier 1. This, in my view, helps give it added business quoting opportunities both at current and new OEMs.

Valuation

I have not taken into account the new business opportunities of the recent announcement as this will not affect my near term revenue estimates. This is because it often takes 2 to 3 years between nomination and volume production in the auto industry. A such, the potential upside from the recent announcement will be back end weighted to the longer term revenue forecasts.

My 12-month price target is based on 3 scenarios: base, bull and bear case, each weighted at 80%, 10% and 10% respectively. For the base case, I assume a 2x EV/S on 2025F sales, discounted back. For the bull case, I assume a 6x multiple on the company’s 2025 target, discounted back. For the base case, I assume a 1x EV/S on half of my 2025F sales forecast, discounted back.)

As such, my 12-month price target is $7.80, implying 65% upside from current levels.

risks

Concentration of revenue

Currently, a large proportion of the order book comes from the 2 auto OEMs, BMW and the newly announced large vehicle group design win. As such, the progress of these two programs will play a disproportionate impact on Innoviz financials. Should any of the two programs see a significantly delayed ramp up or lower than expected ramp up, this will certainly have a material impact to results of Innoviz. One way for Innoviz to combat this would be to try to get more big design wins, which will definitely be challenging but in my view possible, to help diversify its revenue streams.

Industry related risks

As mentioned earlier, lidar is a relatively competitive industry with multiple players fighting for market share. As such, if there is downside to pricing or market share loss, this could be detrimental to Innoviz. Furthermore, if other large OEMs decide to use cameras and radar rather than lidar, this could also be detrimental to the company. Lastly, there could be a delayed ramp up for L3 or higher ADAS/AV programs in general, which could be negative for all lidar companies in general.

Lastly, on margins, there could be a downside to my expectations on margins from higher costs or lower software mix or even lower selling prices. This is again due to the competitive nature of the lidar industry. According to my industry discussions, there are more than 50 suppliers of lidar products in the industry and this could worsen the competitive landscape in the near to medium term.

Cash flow risks

Despite the large design wins, I am still expecting that Innoviz will be seeing negative cashflows for the next few years, as the ramp up in these automotive programs take time and for scale to gradually be reached. This will mean that Innoviz could need additional capital which is a downside risk in my view. This is likely to be a medium term risk as Innoviz still has $300 million in cash as of December 2021, which is sufficient for the next 2 to 3 years.

Conclusion

Innoviz has a lot of potential given that the exponential growth in lidar has yet to even begin. With a strong product and software offering for its customers that requires lidar, it has been able to demonstrate a great track record in winning design contracts from large OEMs and automotive makers like BMW. The winning of large design wins like the one recently announced is key for Innoviz as it will ensure they are able to compete at scale in a competitive lidar market by lowering its cost structure, and its unit economics, eventually giving it an advantage of being in a position to offer competitive prices to customers as well. My 12-month target price for Innoviz is $7.80, implying 65% upside from current levels.

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