Chesky_W
I have previously written an article on Innoviz (NASDAQ:INVZ) and while the stock has reacted strongly to the positive news we have seen, I think that the company is fast becoming a leading supplier of LiDAR in the world.
Investment thesis
Innoviz is fast proving itself to be a real contender as a leading player in the LiDAR space. With its two large design wins with Volkswagen and BMW, it currently takes up 15% of the automotive market share. Furthermore, the win with Volkswagen brings extra credibility and validation for Innoviz’s technology and improves confidence in the company. The current order book of $6.6 billion, along with 12 other RFIs and RFQs in the pipeline, means that we will see strong near-term growth.
Becoming a tier 1 LiDAR supplier to Volkswagen
Arguably the biggest and best news Innoviz has received thus far will have to be the Volkswagen (OTCPK:VWAGY) announcement. This is Innoviz’s first success in being chosen as a tier 1 supplier, which has implications for future major wins. Innoviz will be the direct supplier of LiDAR sensors to brands in the large Volkswagen Group and Innoviz’s perception software will also be integrated into CARIAD. As the second largest car manufacturer with brands like Audi and Porsche, the Volkswagen Group sells more than 10 million cars each year.
This huge win increases the order book by a magnitude of $4 billion, bringing the total order book to $6.6 billion. As elaborated by management, they expect to have a development period of 3 years and after which, there will be a sales period of 8 to 10 years. The current estimate of $4 billion in order book is based on an assumption of a particular take rate each year of the total of 10 million cars that the Volkswagen Group sells. Over the years, the take rate is expected to increase from 1% to 14% over the 8 to 10 years, implying that the program will ramp up from 100,000 vehicles initially up to about 1.4 million vehicles annually. I think that at the beginning, the roll out of Innoviz’s LiDARs will be for its premium car brands and higher end models and it will then be slowly ramped up to less premium brands over time.
The first ever win as a tier 1 supplier could not have been more favourable for Innoviz given that the win was with Volkswagen. As Volkswagen is known for setting high standards for quality assessment, the fact that Innoviz is now a tier 1 supplier to Volkswagen implies, in my view, that many other car manufacturers could follow Volkswagen’s lead in making Innoviz a tier 1 LiDAR supplier. This is because with the validation from the Volkswagen Group, it means that Innoviz is a reliable supplier that has high standards for production, quality and logistics, amongst other things, as it is able to meet the most demanding requirements set by the Volkswagen Group.
Value proposition demonstrated from the Volkswagen win
The management highlighted several points that led to the design win with Volkswagen. One of which I think is important is that Innoviz is able to provide better performance at a great price, in particular, the company’s new InnovizTwo, that I have elaborated on in my earlier article. In addition to that, Innoviz has additional value proposition which includes experience in automotive with their partnerships with BMW (OTCPK:BMWYY) and Magna (MGA)
Also, I think that another value proposition that Innoviz brings is the large scale that it can operate in due to the Volkswagen design win, which enables competitive costs for smaller scale car manufacturers. Because of the huge program win with Volkswagen that guarantees a certain minimum volume, with the economies at scale in favor, this enables Innoviz to be competitive with other customers at a smaller size.
Furthermore, given that these smaller sized car manufacturers typically follow the decisions that Volkswagen makes, I think that we could see more design wins from the 12 in its pipeline in the near future.
Pipeline continues to be robust
As the company continues to announce new design wins, attention then moves towards what is in their sales funnel and how many other large customers are they talking to. For reference, Innoviz has already met its 2022 targets as highlighted in my previous article. The company currently has 12 automotive RFIs and RFQs. These are for passenger vehicle programs and are all at varying stages.
As a result of the Volkswagen design win, the company currently has a market share of 15% in the automotive market, determined by the number of vehicles their customers sell.
More importantly, I think that it is very encouraging that the company still expects to build on these momentum as we could see 2 to 3 more programs being decided before the end of 2022.
Furthermore, during the second quarter earnings call, management did show greater confidence in being on the shortlist of the 12 companies in its pipeline. Being shortlisted means that there are only 1 or 2 other competitors vying for the win. As a result of the Volkswagen win and its status as a tier 1 supplier, this has increased management’s confidence of a new design win. The odds were initially around one in three, but management is now 50% more confident in a win, increasing the odds of an actual win from these 12 RFIs and RFQs.
Financials
Although there are many big design wins in the headlines, the main driver of revenues will come with the win with BMW and its L4 shuttle program announced earlier. Revenues coming from the recent Volkswagen win could take till 2025 to generate its first revenues. The company has sufficient cash position with $246 million in cash as of the second quarter of 2022. It was also encouraging to learn that the business model of Innoviz is not capital intensive and capital expenditures are paid for by the customers, thus reducing any need for large capital expenditures while expanding.
Valuation
With the optionality that we may see for Innoviz given potential large design wins, I use a weighted valuation methodology to derive the target price for Innoviz.
Based on the forecasted 2025F revenues, I give 80%, 10% and 10% weight to each of the base bull and bear scenarios respectively. In my bear and bull case, I assume a 6x EV/S multiple and 1x EV/S multiple respectively. For my base case, I assume a 3x EV/S multiple. Applying these multiples to the 2025F forecasted revenues for Innoviz and discounting them back, I derive a 1-year target price of $8.95, implying 85% upside from current levels.
Risks
Competition
While Innoviz has demonstrated itself as one of the leading players in the LiDAR space, it is operating in an industry with many other players. If its competitors manage to develop a better product with better performance or lower price point, this could affect future design wins and lead to market share losses. Other players in the industry include Luminar (LAZR) and Velodyne (VLDR). If competition were to intensify, we could see a lower pricing point and thus lower margins for the business.
Concentration risk
Because a large portion of its order book comes from Volkswagen and BMW, this brings a high level of concentration of Innoviz’s order book on 2 companies. As a result, if there were to be any issues with these 2 programs, there could be a huge impact to Innoviz’s business.
Cash flow risks
With almost $300 million in cash, the company has sufficient liquidity in the near term. However, there is a risk that Innoviz could see negative cashflows for the next few years and take time to reach positive free cashflow. As such, the company needs to remain prudent in managing their finances or may risk requiring more capital.
Conclusion
I think we are starting to see Innoviz become a leader in the LiDAR space. With the design win with Volkswagen and its first as a tier 1 supplier, other car manufacturers are bound to take notice and maybe even follow the lead of Volkswagen. Innoviz has got more confidence in bringing in more design wins now with the huge design win with Volkswagen and could see additional near-term catalysts as two to three programs are expected to be decided by end of 2022. The company remains prudent financially, with sufficient financial liquidity in the near term given that there are low capital expenditure requirements. My 1-year target price of $8.95, implying 85% upside from current levels.
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