Why the ‘80/20’ Principle May Be Best for Luminar

Out of the innovations that have sprouted in recent years, lidar arguably offers the most profound change for our society. Over time, the platform can pave the way for true transportation autonomy, a realm that previously only existed in science fiction. And Luminar Technologies (NASDAQ:LAZR) has made impressive progressive in this arena, driving up interest for LAZR stock.

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But as with any burgeoning that offers wild upside potential, competition looms. Today, the publicly traded lidar space is fairly crowded and more upstarts are likely on the way.

Because of this dynamic, there’s a tendency among some analysts to pit LAZR stock with rivals, particularly Velodyne Lidar (NASDAQ:VLDR). While the us-versus-them mentality is incredibly popular in American culture, I think it’s helpful to understand that both companies occupy different regions of the lidar spectrum.

Indeed, Ars Technica contributor Timothy B. Lee wrote an excellent piece featured on Wired.com about the differentiation in the lidar industry. To summarize, Velodyne largely dominates the high-end lidar market. This subsegment is occupied by self-driving companies that are either well-funded or a subsidiary of such. Since they’re often working on prototype vehicles, they want the absolute best, which fits Velodyne’s business model.

On the flip side, you have Luminar Technologies, which is geared toward mass-market automotive applications. Here, the idea is to get lidar equipment as inexpensive as possible; industry experts benchmark this as below $1,000 for economic viability. Luminar claims that it can achieve that target cost at scale, which is one of the catalysts behind LAZR stock.

Occupying the middle ground is Colonnade Acquisition (NYSE:CLA), which plans to merge with Ouster. Featuring high-end sensors that utilize solid-state chip technology, Ouster deploys a simpler lidar that is plenty effective and is priced lower than Velodyne’s offering for the same market.

Each company in the lidar game has a strong case for itself. Therefore, it comes down to what investors think is the most feasible approach. Right now, that’s both the opportunity and challenge for LAZR stock.

Are Investors Losing Confidence in LAZR Stock?

From a bird’s-eye perspective, Luminar seems the most sensible approach and it very well could be. At the most basic level, for autonomy to work, it’s got to be feasible for the everyman. Clearly, Daimler (OTCMKTS:DMLRY) recognized this, taking a minority stake in LAZR stock.

Further, the mass-market end of the lidar spectrum is in some ways less risky. That’s because if the cost can be as cheap as Luminar claims it can be at scale, and its effectiveness gap is on par or within reason of the high-end systems, LAZR stock becomes a no-brainer.

I don’t want to speak for the collective sentiment behind Luminar. However, it appears that the above disruptive potential – high efficacy, low cost – is what gives LAZR stock its “unicorn” valuation. With a market capitalization of $9.9 billion, it overshadows that of VLDR (at $3.9 billion) and CLA ($338 million).

Still, the question becomes, is LAZR stock truly worth that premium? Scouring the blogosphere, that’s where the current debate is. Many believe that Luminar can deliver on its disruptive potential. Others, including notorious short-seller firm Citron Research, do not.

Personally, I believe Luminar’s business is very compelling. However, it doesn’t matter what I think, and it especially doesn’t matter what the company and its legions of fans think. It’s the collective market that will determine the trajectory of LAZR stock and it’s giving perplexing signals.

LAZR stock technical chart
Source: Chart by Josh Enomoto

On the bullish end, I love the technical setup of LAZR. Shares have formed a pennant formation and that outlook is typically optimistic. Some of my readers may remember that last August, I called DraftKings (NASDAQ:DKNG) a high-conviction buy signal on the same premise, even though I didn’t like some of the fundamentals (particularly the pandemic).

Sure enough, DKNG swung higher.

But on the bearish end, it appears that LAZR stock is breaking down. For instance, on the Jan. 15 session, Luminar closed down nearly 5.7%. When seemingly bearish technical formations turn negative, they can become extraordinarily ugly.

How to Approach Luminar Stock

If you’re an options trader, this is a perfect play on volatility. In my opinion, the chance of a huge move is very high. It’s just that predicting where LAZR stock will end up, given its recent negativity, is problematic.

Still, I try my best not to leave my articles on a cliffhanger. Therefore, I would adopt the 80/20 approach. If you’re bullish on lidar generally and LAZR specifically, I’d put 20% of the money you have allocated toward Luminar Technologies down right now.

This gives you profitable exposure if shares break out higher. As well, it gives you some ammunition in case you want to ride up the early portion of the rally. However, if shares break down – and it could break down badly – you have 80% of your earmarked funds intact. You can reassess at that point or buy LAZR at a great discount.

That’s about as fair of an analysis I can provide for Luminar Technologies. I’m cautiously optimistic but keep that powder keg dry.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Article printed from InvestorPlace Media, https://investorplace.com/2021/01/lazr-stock-80-20-principle/.

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