Ouster's Lidar Sensors Show Long-Term Potential, Short-Term Risk

Ouster Inc, a lidar sensors to intelligence company, has a promising long-term business, but after a 300% rally in the past 2-3 months, the risk-reward profile has flipped for the immediate term.

Ouster Inc (NASDAQ: OUST), a company specializing in lidar sensors and intelligence, has shown significant promise in the long term, but recent market dynamics have shifted the risk-reward profile for immediate-term investors. After a 300% rally in the past 2-3 months, the stock has become more speculative, driven by retail momentum and option activity rather than fundamentals.

Fundamentals and Recent Developments

Ouster's business has been improving, with software attached bookings growing 60% year-over-year in 2024 and revenue growth at ~26% in Q1 2025. The company has a strong balance sheet with around $19 million in debt and $170 million in cash reserves. However, most of these developments are not new and do not fully explain the recent price surge. The company's gross margins have structurally improved, reaching a healthy 41% over the past year, indicating a strong business trajectory towards profitability [1].

The recent surge in Ouster's stock price can be attributed to several factors. The Pentagon's approval of OS1 sensors has been seen as a significant validation of Ouster's capabilities, opening up multi-billion dollar markets in defense and government tech. Additionally, the company's AI-driven interpretation of lidar data has been viewed as a narrative boost, positioning Ouster's solution in future tech like autonomous driving and defense systems. However, these developments are not new and have been part of the bull story for Ouster since the earnings beat in Q1 2025 [1].

Valuations and Risks

The recent price surge has outrun fundamentals, with the EV/Sales ratio increasing from below 2x to well above 8.5x. This valuation is aggressive, given that current revenue growth is plateauing at 25% and guidance for Q2 2025 points to revenues between $32-35 million. The company may take up to two years to become profitable, assuming further monetization in its software segment and aggressive adoption by the DoD or commercial use cases [1].

The surge in option activity is a significant risk. Even for an option chain expiring on August 1, 2025, there is an outsized call option activity at far out-of-the-money calls ($33). Support is seen far nearer to the money at $23, indicating a significant speculative interest. This high level of option activity suggests that the market is budgeting for a safety buffer of 30-40% upside, which could lead to large short-term corrections if speculative activity or execution risks increase [1].

Recommendations

For existing early investors, the current environment suggests that it might be time to book partial profits and keep some money on the table. The fundamentals appear strong, but the immediate upside potential appears capped with most of the good news already factored in. However, any pullback in speculative activity or on execution risks could see large short-term corrections. Therefore, a hold position on Ouster is recommended for the potential long-term story, rather than the current valuation/price.

References

[1] https://seekingalpha.com/article/4806969-ouster-long-term-potential-short-term-euphoria