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Notes

  • While quality issues are emerging in SPACs, it hasn’t mattered
    • We have focused on identifying SPACs that are decent businesses, fit our process, and are trading with asymmetric return profiles. That basket is narrow now, but CLA/Ouster fits. While issues around disclosures and the “F” word may emerge, they do not seem to be having a broad effect on SPAC trading, even if gains have stalled somewhat. SPAC cash infusions will have a disruptive effect on existing competitors and industries, a trend that should be encouraging to watch.
  • Ouster is one of the most promising LiDAR/Sensor competitors
    • In addition to being on key autonomous vehicle platforms and focusing on many non-automotive applications, Ouster is positioned to emerge with among the lowest cost/highest quality product sets.
    • Ouster uses a cost effective, simplified architecture based on custom system-on-a-chip design instead of analog sensors with digital components.
    • The single photon avalanche diode (SPAD) detector array pairs with an energy efficient vertical-cavity surface – emitting laser (VCSEL) for a digital solution that gets cheaper with scale.
    • Legacy architectures from Velodyne look much the same but may not offer scale and cost benefits available to Ouster as the LiDAR market grows.
    • Segmentation should emerge, with range, resolution and other performance axes allowing for a broader suite of solutions.
  • We expect CLA to trade into $20s, rich comps place post-deal value at $40
    • Ouster has hundreds of customers in a burgeoning product category, with placement on a variety of long-lived manufacturer platforms that should be in production for many years.
    • The Ouster management team is engineering focused, but should do more press/analyst interaction in the next month or two to get CLA’s story out.
    • While we suspect the enthusiasm for Autonomous Vehicles, robots, drones, safety equipment, and ubiquitous sensors may be excessively reflected in comparable valuations, expectations for LiDAR sales are largely based on in-process product development.
    • We are most interested in CLA near the redemption price, but would be interested into the mid $20s… even in richly valued companies place CLA > $40.
  • Risk on environment for now as our Macro team has us in Quad 2 (growth and inflation accelerating) until we will head into Quad 4 (growth decelerating and inflation decelerating) in 2H21
    • With accelerating inflation and the impact of stimulus, it isn’t a bearish or “normal” backdrop
    • Its reasonable to expect Macro to have a sizable influence, especially when the growth re-acceleration hits a Quad 4 wall in 2H21.
      • Our best guess is we won’t want ‘growthy, small’ longs later in the 2nd quarter
    • Auto component suppliers do well in Quad 2, not in Quad 4
      • Given the autos, factory automation, and machinery are large end-markets, its reasonable to suspect LiDAR suppliers will trade with these groups.
  • Dramatically simplified
    • Simplified architecture allows scale to bring cost down
      • Costs drop ~90% at ~1 million units, which is significantly higher scale than the current few thousand unit run rate – that scale effect facilitates adoption.
    • Most LiDAR alternatives try to re-create LiDAR
      • Gives direct and precise range data without maps or other workarounds
        • If LiDAR data were available in real-time, the mapping workaround might be avoided and the data more accurate and current.
      • Camera data needs to be interpreted via AI, other computational solutions
        • The combination of LiDAR, cameras, and radar should help provide the superior solutions needed for safe AV adoption.
      • LiDAR can replace the many cameras needed, more weather independent
        • Camera field of view is often narrower than LiDAR, requiring multiple cameras to cover the 360-degree view with equivalent coverage to a LiDAR system.
        • In general, LiDAR performs much better in adverse weather conditions, a context in which monitoring conditions often has the greatest value.
    • Radar is improving, but resolution likely to remain squishy
      • LiDAR vs. Radar – combining multiple sensor inputs likely to be most effective
    • Cost a primary impediment for LiDAR implementation
      • LiDAR offers the 4D position, motion, and context information needed for moving objects
    • AV solutions becoming increasing common, sophisticated
      • Consumers are paying up for advanced ADAS, and many LiDAR applications will be outside of AVs
    • Vehicles are becoming increasingly dependent on electronics
      • Matching inputs with desired outputs is essential as electronics take on more vehicle operation and equipment value.
    • Ouster expects costs to drop facilitating broader adoption
      • VLDR previously charged $75k per LiDAR as the legacy player with a complex legacy architecture
    • ASPs: Future Ouster already cheaper than current Velodyne
    • ADAS tech could reduce accident frequency by ~30%
      • Could well end up being a regulatory requirement – think Vision Zero, especially as AV and humans interact on roads
    • LiDAR tech increasingly adopted, more in 2021 and 2022
      • As data sets, testing/verification, and expensive software get built and optimized around LiDAR inputs, adoption should follow.
      • Being spec’d into platforms – beyond just cars – is a huge structural advantage.
    • Profitability outside automotive likely better, easier wins
      • Auto OEMS likely to develop in house ADAS systems
    • Ouster is focused on markets outside automotive
      • The high cost of historical LiDAR systems limited their scope, but lower price points open enormous new markets from traffic management to heavy equipment safety
    • Technologies like LiDAR scale when costs decline
      • Getting the digital architecture should make LiDAR cheap enough
    • Industrial LiDAR tech
      • Caterpillar debuted for the first time ever at CES, Consumer Electronics Show, in January. CAT has 350 trucks running 24/7 autonomously. CAT’s autonomous technology has grown double digits over 2019.
  • Competitive Set-Up
    • Cost advantages + Partnerships + LiDAR adoption
      • Ouster is likely to be a winner in segments of this market, or at least a consolidation target for integrated solutions providers
    • NVIDIA, Others illustrate product with best prospects
      • Getting spec’d onto equipment, software, and data libraries is a key for Ouster, along with IP and engineering capabilities
    • Ouster attacking incumbent Velodyne… VLDR hasn’t grown
      • Coincides with broader AV introductions; the 3 years of declining revenue for Velodyne – partly product maturation, partly Ouster cost edge
    • More diversified customer base for Ouster
      • Dependency on auto supply chain limits customers and pricing power, where Sandvik & Volvo Construction Equipment are less inundated with LiDAR patches
  • Valuation and Set-Up
    • Ouster is starting out with 2020 positive gross margin, with a clear growth trajectory via orders
    • Capital deployed toward scale development, new products
      • Young company with SPAC cash > young company without SPAC cash – SPACs in LiDAR change dynamic
    • CLA obviously cheap if comps are valued correctly
    • 10x 2025 EBITDA would obviously be low if the economy grows as projected… and some of that growth is in the pipeline
    • CLA has some attractive option premium available
      • If one would sell $25 anyway, the out of the money premium can limit potential downside – not all SPACs have options (other than warrants)
  • A few risks:
    • Safety regulations, particularly those in passenger vehicles, could be changed to have an adverse impact on LiDAR systems
    • Ouster may not achieve profitability as expected
    • If Ouster cannot scale and reduce its LiDAR costs, it may struggle to compete in a price sensitive market
    • 60% of Ouster’s manufacturing output is provided through a partnership with Benchmark Electronics, although the company has had other relationships in the past
    • Customers may decide to develop in house systems that compete with Ouster’s products as Waymo did and dropped competitor, Velodyne
    • While unlikely, a technology could replace LiDAR for automotive and industrial OEMs rendering Ouster’s products obsolete
    • With CLOV and other troubled SPACs, the group may perform poorly
  • Upshot: LiDAR input imbedded, Ouster has market expanding costs
    • While SPACs may not perform well as the economy decelerates in 2H21 amid expectations of higher taxes and less stimulus, the outperformance of ‘risk on’ assets remains a key factor in 1H21. CLA fits key style factor criteria, while offering an asymmetric return.
    • LiDAR is set to grow rapidly in coming years as platforms and software packages are built around the technology. While segmentation remains, a simplified, fully digital architecture should allow for lower price points and widespread adoption analogous to cameras. Ouster is well positioned to capture market share amid this broader LiDAR growth.
    • We expect shares of CLA to trade into the mid-20s as management gets out to pitch the company’s advantages and pipeline. Valuations of comparable companies and competitors are far higher, with many strategies too focuses on the AV market.