As driverless cars gain popularity and get set for a large-scale adoption ahead, investors have bet big on the very core technology that drives the segment i.e. Lidar, which stands for light detection and ranging. The technology uses lasers and bounces it off surrounding objects to help computers (a car, in this case) detect distances, velocity and altitude, among others, and facilitate better navigation for self-driven cars.

Shares of Lidar firms and startups have surged recently, as autonomous and electric vehicle manufacturers ramp-up production to meet increasing demand. Take a look at the chart below showing percentage returns of two major Lidar names — Luminar Technologies (LAZR) and Velodyne Lidar (VLDR) — in the past three months.

Performance of Lidar and Velodyne over the last 3 months

While there haven’t been specific reasons behind the stocks’ rally, reports indicate that increasing usage of electric vehicles and innovations around autonomous cars have aided these shares.

Over the past few months, big automobile companies have announced their foray into e-vehicles or have tied up with companies to further their e-vehicles’ plan. For instance, General Motors (GM) formed a new unit to sell electric vans, Microsoft (MSFT) made an investment into its autonomous car division Cruise, and Apple (AAPL) is also believed to be in the process of developing its own electric car.

Catching investors’ eye

Among the firms specialising in Lidar, Luminar Technologies and Velodyne Lidar have been shored up heavily by investors. In fact, Luminar surged about 92% between December 1, 2020 and January 29, 2021, while Velodyne is up nearly 44% during the same period.

Luminar, which has a market capitalisation of around $10 billion, focuses on building sensors to be used in mass-market vehicles. It is extremely popular among investors and vehicle manufacturers given the price of its sensors of under-$1,000 per unit to automakers. It claims to have a viewing range of 250 metres and has partnered with 50 companies, including seven of the top 10 global auto players.

Velodyne, on the other hand, offers high-performance and high cost lidar sensors. Its sensors, 360-degree units placed on vehicles’ roofs, is likely to be used in prototype self-driving cars and other applications in research and development.

With good growth potential and faster adoption of sensors, other companies in the business too are looking to throw their hat in the going-public ring.

To name a few, Collective Growth Corp, a special purpose acquisition vehicle (SPAC), is set to merge with Israel’s Innoviz Technologies that makes lidar sensors, and its key investors include Magna (MGA), Aptiv (APTV), and Softbank.

What are the risks?

While customers have looked to aggressively adopt electric vehicles and companies rush to meet driverless technology deadlines, the COVID-19 pandemic has had its impact on these companies. Clients have held back on purchases and companies too are facing operational hindrances that have forced them to lower their earnings forecasts.

For instance, Velodyne recently lowered its 2020 revenue outlook to $94 million, $7 million below the earlier $101 million guidance. Q4 revenue is expected between $15.5 million and $16 million, far lower than consensus estimates of $27.3 million.

Besides pandemic concerns, sceptics have raised doubts whether Lidar is indeed the right technology to be used. Among the significant people to have doubts about it is Tesla CEO Elon Musk, who had famously said last year, “Lidar is doomed.” Having said that, manufacturers such as Alphabet’s (GOOGL) unit Waymo has kept its focus on the technology and sold its own lidar sensors too.

There’s a threat of intensifying competition in the space as many companies look to foray or expand into the segment. Apart from Luminar and Velodyne, Waymo and Cruise (a unit of General Motors) have also looked to firm their grip on the sector. Velodyne, in fact, raised capital through its own SPAC merger.

Summing up

Lidar technology-driven vehicles are likely to facilitate mass-production and generate bigger revenues for such companies. In fact, as per this study, over the next five years Lidar for the automotive market will register a 23.5% CAGR in terms of revenue and the global market size will reach $ 482.3 million by 2025 from $207.3 million in 2019. Promising numbers aside, companies are yet to fire on all cylinders, which may make conservational investors wary of their valuations, but optimists look at such names with hopes of it becoming the next Big Tech firm. An autonomous investment approach holds the key.