Ouster Inc. Equity Research Report

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January 5, 2025

Ouster Inc. is an American company that specializes in multi-beam flash lidar technology, which is cost-effective, compact, durable, and energy-efficient. With a 240-meter range for automotive applications and plans for mass sales by 2025, Ouster’s lidar technology is unlocking real-world AI potential, helping autonomous machines to operate reliably even in challenging environments.

Ouster currently holds a Zacks Rank #2 a ‘Buy’ Indication, placing it among the top 20% of over 4,000 stocks ranked for earnings estimates. This strong rank, supported by an 8.3% upward revision in the Zacks Consensus Estimate for earnings this year, highlights growing optimism about Ouster’s financial performance.

In this report, we’ll explore why Ouster’s financial metrics, innovative technology, and market positioning make it a compelling choice for investors.

The company’s financials also show promise. Ouster boasts a 29% gross margin, indicating profitability on every lidar unit sold. Its diversified customer base spans 15 industries, balancing revenue streams. With $189 million in cash reserves and minimal cash outflows, Ouster is on track to achieve profitability without needing significant debt or shareholder dilution.

Here’s a quick overview of Ouster’s financial metrics from 2021-2024:

Metric	2024	2023	2022	2021
Market Cap	608	312	159	892
Enterprise Value	479	179	63	684
PE Ratio	5.13	3.75	3.89	26.58
Price/Book Ratio	3.52	1.74	0.93	3.42
Price/TBV Ratio	2.00	2.01	1.56	4.77
Share Price	12.22	7.67	8.63	52.00
Total Shareholder Return	-41.11%	-108.19%	-32.86%	-649.86%

With a 40% revenue growth forecast and profitability anticipated by year-end, Ouster is positioned for long-term success.

Company Overview: Ouster Inc.

History and Products

Ouster, Inc. has expertise in producing lidar sensors used across various industries, including automotive, industrial, robotics, and smart infrastructure. Their products range from high-resolution scanning lidar sensors to solid-state digital lidar sensors, analogue lidar sensors, and software solutions.

It is headquartered in San Francisco, California, Ouster aims to improve safety, efficiency, and quality of life through its lidar technology, which helps machines “see” and understand their surroundings. Ouster’s CEO & director is Mr Charles Angus Pacala, and CFO & Sr. VP is Dr Theodore L. Tewksbury III.

Ouster has developed several key products, including the Ouster Sensor, a scanning sensor, and the Digital Flash sensor, which is a solid-state flash lidar sensor. One of their notable innovations is the Gemini perception platform, designed for smart infrastructure deployments. Ouster also offers solutions like BlueCity, powered by Gemini, aimed at traffic operations, planning, and safety.

While competitors like Hesai have established significant automotive partnerships, Ouster is building a strong presence in robotics and industrial sectors, avoiding dependence on a single market.

With a growing customer base and significant order commitments, Ouster is well-positioned to continue driving the future of lidar technology across multiple industries.

Ouster’s Stock Performance

Ouster’s stock was priced at $12.22 on December 31, 2024, closing at $9.62 by the end of November, marking a 36.5% increase for that month alone. Over the past three years, however, Ouster has seen a decline of -38.64%. Despite this, Wall Street analysts are optimistic about Ouster’s future, projecting a potential 27.9% upside, with mean price targets suggesting a possible rise to $12.30.

The variance in analysts’ price targets is notable. While the lowest estimate suggests a modest 4% increase, the most optimistic prediction points to a substantial 76.7% surge, reaching $17.00. A lower standard deviation in these estimates indicates greater agreement among analysts, suggesting a more likely alignment in stock price movements.

While price targets can offer some guidance, they should not be the sole basis for investment decisions. Research shows that analysts often set overly optimistic targets, influenced by business relationships or incentives. Therefore, skepticism is key when considering these projections.

Earnings Estimates and Future Growth

One of the driving forces behind the optimism surrounding Ouster’s stock is the increasing agreement among analysts regarding better-than-expected earnings. Positive revisions in earnings estimates over recent months indicate a potential upside in the near term. In fact, empirical research shows a strong correlation between rising earnings estimates and short-term stock price movements.

Looking ahead, analysts predict Ouster’s stock price will average around $20.76 in 2025, with some estimates reaching as high as $41.37. In 2026, the forecasted average price stands at $17.00, with predictions ranging from $4.50 to $29.50. These projections reflect an expected rise of 69.91% and 39.11% from the current $12.22.

Strategic Moves

Ouster’s transition from the New York Stock Exchange (NYSE) to the Nasdaq Global Select Market on December 23, 2024, is also seen as a strategic move positioning the company alongside other innovative and high-growth tech firms. This change enhances its market visibility and could attract more investor confidence, further supporting the potential for upside in Ouster’s stock.

Industry Overview of Ouster Inc.

Tech Developments and Market Position

Ouster’s portfolio includes notable tech developments that are strategically significant for its future growth. The company’s L4 sensor prototype milestone and Chronos chip development showcase progress in cutting-edge hardware. These developments not only reflect Ouster’s commitment to innovation but also suggest its ability to stay ahead of competitors in the lidar market.

Another key achievement is the BlueCity solution, which received NEMA TS2 certification and integrated with Genetec Security Center. These advancements have expanded Ouster’s market reach, particularly in smart infrastructure. With increased software-attached sales, Ouster has successfully built recurring revenue streams, enhancing its long-term financial stability.

Competitor Analysis

Ouster Inc., stands as a notable player with a market cap of $608 million, competing against larger players like Azenta and Enerpac Tool Group, which have market caps in the billions. While these established competitors dominate in size, Ouster’s niche focus and innovation may allow for differentiation and growth potential.

Largest Shareholders of Ouster Inc. (OUST)

Vanguard Group Inc.
BlackRock, Inc.
D. E. Shaw & Co., Inc.
State Street Corp.
VTSMX – Vanguard Total Stock Market Index Fund Investor Shares
IWM – iShares Russell 2000 ETF
Tao Capital Management LP
Geode Capital Management, LLC
Penn Capital Management Co., Inc.
VITAX – Vanguard Information Technology Index Fund Admiral Shares

These institutional investors collectively hold a significant portion of Ouster’s shares, demonstrating confidence in the company’s growth potential despite a highly competitive industry.

SWOT Analysis of Ouster Inc.

Strengths:

Diversified customer base across multiple markets, reducing dependency on any single industry.
Improving gross margins with record levels, signalling operational efficiency.
Flexible product line adaptable to various applications.
A strong liquidity position ensures financial stability.
Customer retention rate at 85%, maintaining brand loyalty.

Weaknesses:

Lowered near-term revenue expectations due to slower-than-expected adoption rates.
Ongoing operational losses and negative free cash flow.
Dependency on new technology development (e.g., Chronos Chip) for future growth.
High customer acquisition costs (CAC) of approximately $120 per customer.

Opportunities:

Expansion into new market verticals leveraging the Chronos Chip.
Growing demand for lidar technology in autonomous vehicles and smart infrastructure.
Potential for large-scale purchase orders to drive revenue growth.
R&D investment of $3M annually to maintain competitive differentiation.

Threats:

Intense competition in the lidar industry with high barriers to entry.
Supply chain disruptions affecting production and costing efficiency.
High bargaining power of buyers, driven by price sensitivity.
Pricing pressure due to aggressive competitors, reducing profit margins.

Porter’s Five Forces Analysis

Threat of New Entrants: Moderate due to capital investment, economies of scale, and brand loyalty.
Bargaining Power of Suppliers: Moderate, with dependence on key suppliers accounting for 60% of raw material costs.
Bargaining Power of Buyers: High, with 72% prioritizing cost over brand loyalty.
Threat of Substitutes: Significant due to low switching costs and frequent product innovation.
Competitive Rivalry: High, with Oust holding a 22% market share in a growing $1.2B TAM.

This analysis provides a comprehensive view of Ouster’s strategic position within the industry.

Financial Analysis of Ouster Inc.

Q3 Quarter 2024 Highlights

In the third quarter of 2024, Ouster reported impressive results:

Revenue: $28 million, representing a 26% year-over-year increase and a 4% sequential increase.
Sensor Shipments: Over 3,900 sensors shipped, generating revenue.
Gross Margin: GAAP gross margin of 38%, up from 14% in Q3 2023 and 34% in Q2 2024. Non-GAAP gross margin reached 45%, compared to 33% in Q3 2023 and 40% in Q2 2024.
Net Loss: $26 million, improved from $35 million in Q3 2023 and $24 million in Q2 2024.
Adjusted EBITDA Loss: $10 million, a reduction from $18 million in Q3 2023 and $11 million in Q2 2024.
Cash Position: $154 million in cash, cash equivalents, restricted cash, and short-term investments as of September 30, 2024.

Positive News

Revenue Growth: Ouster’s Q3 2024 revenue of $28 million reflects impressive growth, a 26% increase from the previous year. This growth is supported by a solid demand in robotics and smart infrastructure sectors.
Improved Margins: The significant rise in both GAAP and non-GAAP gross margins demonstrates operational efficiency, allowing the company to sustain profitability despite a challenging market.
Debt Management: Successfully repaying its revolving credit line signifies financial discipline and a healthy cash flow position. The company holds $154 million in cash, providing a strong buffer for its operations.

Areas of Improvement

Net Loss and Cash Burn: Despite improved financial performance, Ouster continues to report a net loss and faces negative free cash flow. Its adjusted EBITDA loss of $10 million highlights the need for continued cost management and efficiency improvements.
Probability of Bankruptcy: Ouster has a 58.6% probability of bankruptcy within the next 24 months, given current financial fundamentals and market conditions. This raises concerns about its ability to sustain operations long-term without further financial restructuring.

Liquidity and Solvency

Solvency Score: Ouster Inc. (OUST) faces mixed signals regarding its solvency. A solvency score of 45/100 indicates moderate financial health, suggesting that the company may struggle to meet its long-term debt obligations effectively.

Current and Quick Ratios: Ouster’s current ratio stands at 1.50, indicating sufficient current assets to cover its short-term liabilities. This suggests that the company has enough liquidity to meet its short-term obligations comfortably. However, the quick ratio, which excludes inventory, is 0.85, further pointing to limited liquidity to handle unexpected cash needs.

Cash Flow Health: Ouster holds $154 million in cash reserves, which appears strong compared to its debt levels. However, cash flows from operations have been negative, with a significant cash burn of $58 million in the past year. This reflects challenges in sustaining operations without external funding and raises concerns over future liquidity.

Debt Position: Ouster has a long-term debt of $44 million, which represents a substantial burden relative to its cash reserves. This high debt level, coupled with its negative free cash flow, contributes to its lower solvency score, signalling potential difficulty in servicing debt and maintaining solvency.

Valuation Analysis of Ouster Inc.

Discounted Cash Flow (DCF) Analysis: The DCF model estimates Ouster’s intrinsic value at -10.83 USD per share, indicating significant overvaluation. This negative value stems from assumptions of persistent cash burn and high discount rates, reflecting market optimism that may not align with the company’s current financial position.

Profitability: Ouster’s profitability score of 26/100 further reflects weak financial performance, with low margins and negative free cash flow generation.

Intrinsic Value: The base case intrinsic value of 11.66 USD suggests that Ouster’s stock is overvalued by 5%, based on a discount rate of 12% and moderate growth expectations.

Overall, Ouster Inc. faces significant challenges in both solvency and valuation, making its current stock price potentially unsustainable given its financial position.

Why ‘Buy’ Ouster Inc. Stock?

Solid Financial Backing: Ouster Inc.’s total asset value stood at $455 million as of September 30, 2024, reflecting a strong balance sheet despite challenges in recent years.
Attractive Valuation Indicators: The current share price is $12.22 (NYSE, December 31, 2024), and the stock carries a Zacks Rank #2 (Buy), placing it in the top 20% of over 4,000 ranked stocks. With an ABR of 1.40 (between Strong Buy and Buy), it shows significant analyst confidence.
Positive Earnings Revisions: Analysts have raised the consensus EPS estimate by 8.3% for the current year, indicating optimism about Ouster’s earnings potential.
Strong Market Position: Ouster’s leadership in the lidar market, backed by innovation and growing demand in autonomous technology and industrial automation, adds to its appeal.
Analyst Support: Reaffirmed Buy ratings from Craig-Hallum and Outperform ratings from Northland bolster investor confidence, making Ouster a promising pick for 2025.

Investors seeking growth in lidar technology and autonomous solutions should consider Ouster for its strong market position and analyst confidence.

Risks and Challenges with Ouster Inc.

Supply Chain Disruptions: Persistent global supply chain issues could hinder Ouster’s ability to meet production targets and satisfy customer demand.

Customer Adoption: Ensuring that its lidar solutions align with evolving market needs and offer superior value over competitors remains a critical challenge.

Pricing Pressures: Intense market competition may force Ouster to adjust pricing strategies, potentially affecting its gross margins and profitability.

Financial Risks: Ouster has reported significant EBIT losses, negative cash outflows of $141M, and a $374M accounting loss in the past year. While holding $146.2M in net cash provides short-term security, raising additional capital may be necessary if profitability remains elusive.

Unprofitability: Not expected to turn profitable within the next three years.

Shareholder Dilution: Increased share issuance in the past year has diluted shareholder value.

Despite these risks, Ouster’s robust revenue growth and strong cash position offer potential for long-term rewards if operational efficiencies and market traction improve.

Final Recommendations

Ouster Inc. presents a promising opportunity for investors looking to tap into the growing lidar market. While the company faces challenges like supply chain disruptions and pricing pressures, its strong revenue growth, innovative technology, and expanding market presence make it a compelling buy.

With analysts expressing optimism and a Zacks Rank #2 (Buy), Ouster is well-positioned for success in 2025 and beyond, especially as demand for lidar solutions in autonomous technology and industrial automation grows. Its solid cash position and strategic focus provide a foundation for long-term growth, making it an exciting stock pick for forward-thinking investors.