GRAF) stock is that it is a bet on the growth of self-driving cars. Graf, a special purpose acquisition company (SPAC), is merging with Velodyne Lidar, a key supplier for autonomous vehicles.” data-reactid=”12″>The simple reason to buy Graf Industrial (NYSE:GRAF) stock is that it is a bet on the growth of self-driving cars. Graf, a special purpose acquisition company (SPAC), is merging with Velodyne Lidar, a key supplier for autonomous vehicles.
Source: Dmitry Eagle Orlov / Shutterstock.com
That simple case probably is enough. Self-driving cars unquestionably are the future. They are one of the real hypergrowth trends of the coming decade, a period I’ve called the Roaring 2020s.
Obviously, self-driving cars won’t arrive tomorrow, or even next year. But they’re on the way. And as we’ve seen elsewhere in the market, investors remain content to wait years, if necessary, for the market’s best growth stories. Graf and Velodyne well could be one of those stories.
InvestorPlace – Stock Market News, Stock Advice & Trading Tips” data-reactid=”31″>InvestorPlace – Stock Market News, Stock Advice & Trading Tips
But what makes GRAF stock truly exciting is that it is more than just a play on autonomous vehicles. Its LiDAR (light detection and ranging) technology has applications far beyond passenger cars.
Investors already are optimistic toward the opportunity. GRAF stock has more than doubled since the merger was announced. From here, that rally looks like only the beginning.
Understanding Graf and Velodyne
Graf itself went public as a SPAC in late 2018. Also known as blank-check companies, SPACs are used to bring private companies to the public markets via merger instead of the traditional initial public offering. The private company gets a guaranteed price (and a guaranteed amount of capital), and usually pays lower fees in the process.
first-mover advantage in LiDAR development. It has already generated more than $600 million in revenue since its founding. And it now has 18 different multi-year agreements with some of the biggest automotive original equipment manufacturers worldwide.
2020 revenue will near $101 million. Over half that total comes just from agreements already in place. And by 2022, Velodyne should post both positive EBITDA (earnings before interest, taxes, depreciation and amortization) and free cash flow.
It is not as if growth stalls out next decade, either. Again, autonomous vehicles are a secular, multi-decade growth market. But the good news for GRAF stock is that investors don’t need to wait for that trend to see profitability arrive.
More Than Self-Driving Cars
According to this week’s presentation, only about a quarter of Velodyne’s revenue comes from autonomous vehicles. Advanced driver-assistance systems (ADAS) appears to be the primary category at the moment.
ADAS should underpin near- to mid-term growth. Velodyne already has won several key deals, and is in talks for several more (again, with the world’s largest automakers).
That growth will be attractive, because Velodyne is adding its Vella software to its LiDAR hardware. That adds a recurring revenue component to the top line, and better profit margins to the bottom line.
Longer term, LiDAR applications will extend beyond self-driving cars. Trucks and delivery vans are potential markets. But even beyond vehicles, “smart” traffic systems and even drones can benefit from Velodyne’s technology.
It bears repeating: This isn’t just a self-driving car play. GRAF stock instead is a play on the future of the entire transportation industry.
GRAF Stock Looks Cheap
168 million shares outstanding. That means the current price suggests a market capitalization around $4.2 billion.
That figure is less than 5x the company’s estimate of 2024 revenue. Given that a chunk of that revenue is coming from software, that multiple is more than reasonable.
And with profitability and positive free cash flow on the way, the SPAC merger should satisfy most, if not all, of the company’s capital needs. Investors don’t need to worry about constant dilution, a risk with a number of other growth stocks.
By the standards of the market, GRAF stock looks cheap. It looks even more attractive given the valuations assigned other stocks with exposure to autonomous vehicle growth.
All told, there is a strong story here and a still-attractive valuation. That is a wonderful combination, and one that suggests that the rally in GRAF stock is a long way from over.
Click here to see what Matt has up his sleeve now.
More From InvestorPlace
Graf Industrial Is A Great Bet on the Future of Transportation appeared first on InvestorPlace.” data-reactid=”66″>The post Graf Industrial Is A Great Bet on the Future of Transportation appeared first on InvestorPlace.
