Shares of self-driving technology company Luminar (NASDAQ:LAZR) have been hammered amid the recent tech sector meltdown, as a sharp rise in long-term yields has put significant downward pressure on growth stock valuations. From its early February highs, LAZR stock has plunged more than 40%.
That’s a steep drop in a stock that has very strong fundamentals. Ultimately, this drop will turn into a great buying opportunity wherein Luminar stock will double rather quickly.
To be clear, I’m not saying LAZR stock will reverse course right now and drive back to $40. The tech sector selloff is a bloodbath, and bloodbaths like this tend to take some time to shake out.
But, what I am saying is that Luminar is a world-changing company, and that relative to the company’s healthy long-term growth prospects, LAZR stock is significantly undervalued today. Indeed, my numbers say shares are worth about $50 today.
That means that if time is on your side, LAZR stock looks like a great buy at currently depressed prices.
Here’s a deeper look.
LAZR Stock: Hammered on Short-Term Fears
LAZR stock has been hammered over the past few weeks because of fears related to a sharp rise in long-term bond yields. The basic thinking is that, as long-term yields rise, equity valuations will correct lower, because stocks and bonds are competing investment vehicles, so as bond yields rise, the required rate of return on stocks rises, too.
That thinking makes a ton of sense. And if yields were to rise forever, then I’d say growth stocks like LAZR stock will keep plunging.
But yields aren’t going to rise forever. Instead, it looks like the 10-year Treasury yield will max out around 2% over the next few years.
Here’s the thinking.
Historically, the 10-year Treasury yield has very closely tracked the sum of the 3-Month Treasury yield (a proxy for inflation which the Fed controls with its target interest rate) plus real GDP growth. This relationship is unmistakably strong.
Importantly, the 10-year yield has historically never surpassed the 3-month yield plus real GDP growth unless during a time of significant economic contraction (and therefore, negative GDP growth).
The Fed has reiterated multiple times that they will not move on interest rates anytime soon. Thus, the 3-month Treasury yield will remain near-zero for the foreseeable future.
Real GDP growth is expected to jump to 4% this year in a sharp “bounce-back” year. But normalizing out for Covid-19 noise, real GDP growth in 2022 and after is expected to hover around 2%.
Thus, normalized, the 10-year yield should settle around 2% and remain there for most of 2022 and 2023. We are at 1.5% today. By my math, then, yields have another 50 basis points to go over the next 24-plus months. That’s a slow and steady grind higher.
To that end, I think we’re close to the end of the surge in long-term yields. Once the bond market calms down, I fully expect growth stocks like LAZR stock to bounce back.
Luminar Is Still Changing the World
Ignoring interest noise for a second, Luminar is still changing the world.
The key to unlocking full autonomy is to enable cars to have complete “vision” – or, more specifically, give them a human-like ability to see and respond to their surroundings.
Ideally, you want to do this with built-in cameras, since cameras are space and cost efficient. But computer vision has significant limitations, so it has become commonplace across the AV space to equip cars with add-on, laser light perception sensors called LiDAR.
These LiDAR sensors essentially beam out laser pulses to their surroundings. Those laser pulses return to the sensors. The sensor then either carefully measures the time-of-flight of those laser pulses, or a change in frequency of the returning light wave, to create a proxy for distance. Do this thousands of times in a 360 degree frame-of-view, and voila… you have a complete and dynamic “picture” of the surrounding environment.
Most industry insiders agree that as semi- and fully-autonomous cars take over the roads in the 2020s, LiDAR sensors will become ubiquitous.
When it comes to the LiDAR space, Luminar is best-in-class.
The company has leveraged multiple technological breakthrough innovations to develop the industry’s best LiDAR sensors – and it’s not even close. Luminar’s sensors have the:
- Longest range (250 meters of visibility, versus 150 meters or less across all other LiDAR sensors).
- Best resolution (300 pixels/degree of resolution, versus 100 pixels/degree of resolution across all other LiDAR sensors).
- Best weather resilience (Luminar’s sensors perform nearly as well in bad weather as they do in good weather, whereas most other LiDAR sensors degrade significantly in poor weather).
- Strongest interference-proof technology (Luminar’s sensors boast zero interference from sunlight and other LiDAR, whereas most other LiDAR sensors struggle with blocking out that interference).
Equally as important, Luminar has figured out a way to streamline and scale manufacturing of these LiDAR sensors so that they are the lowest-cost high-performance LiDAR in market, with costs coming in at under $1,000 per vehicle (a feat no other LiDAR maker has yet achieved).
So, when it comes to making low-cost, high-performance LiDAR, Luminar has no parallel. That’s important, because LiDAR on the cusp of changing the world by being the sensor technology which enables autonomous driving. To that end, Luminar’s sensors will likely be deployed on tens of millions of cars by the end of the decade. They’ll be as commonplace in the cars of 2030 as back-up cameras are in cars todays.
So, all in all, the fundamental growth narrative underlying LAZR stock — the one wherein the company is bringing self-driving mainstream through market-leading and breakthrough technology — remains healthy.
Luminar Stock Has 100%+ Upside Potential
I cannot tell you exactly when the sell-off in Luminar stock will end. But, what I can tell you is that — even after factoring in higher rates — Luminar stock is significantly undervalued relative to the company’s long-term earnings growth potential.
By 2030, I see Luminar’s sensors being deployed on roughly 5% of vehicles globally. This leads to me modeling for nearly $6 billion in revenue by 2030. EBITDA margins should run towards 50%, both because: 1) the company will command pricing power on its LiDAR sensors given their enormous technology edge, and 2) the company has an accompanying, high-margin software business model which most customers will purchases since it is what enables the LiDAR tech to be continuous and useful.
On those assumptions, I see profits sprinting towards $2.5 billion by 2030.
With those inputs, my valuation model outputs a fair value for LAZR stock today of about $50.
That’s more than 100% above where shares trade currently.
To be clear, LAZR stock may not rebound back to those levels right away. But the fundamentals eventually and inevitably always win out. Thus, whenever this stock market bloodbath does end, I do think Luminar stock will end up doubling in a hurry.
Bottom Line on LAZR Stock
The tech sector meltdown has created multiple great buying opportunities for long-term investors. LAZR stock is one of the best stocks to buy amid this meltdown.
But it’s not the best growth stock to buy on the dip.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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