Luminar Technologies (LAZR 3.88%), a producer of automotive lidars, has burned a lot of investors since its public debut on Dec. 2, 2020. Its stock opened at $354.75, set a record high of $627 five days later, but now trades at about $6.

Like many other start-ups backed by special purpose acquisition companies (SPACs), Luminar overpromised and underdelivered. Rising rates then highlighted its losses and crushed its valuations. But at these depressed levels, could Luminar be a good contrarian play for the next three years?

Image source: Getty Images.

Understanding Luminar's lidar business

Lidars, also known as LiDAR (light detection and ranging) systems, use lasers to detect the distance of surrounding objects and create detailed digital maps. They're often used to help driverless vehicles detect other vehicles, pedestrians, and obstacles.

Luminar established an early-mover advantage in the nascent lidar market when it was founded in 2012. But today, it faces stiff competition from similar companies like Cepton, Velodyne Lidar (NASDAQ: LIDR), and Aeva (NYSE: AEVA).

Luminar differentiates itself from those competitors by using infrared light at the 1,550nm wavelength, which is much higher than the wavelengths used by its main competitors. It claims that higher wavelength enables its Iris lidar to "see" more objects at a longer range and higher resolutions than other lidar systems.

That's a bold claim, but plenty of major automakers -- including Volvo and Volkswagen's Audi -- have already installed its lidars in their vehicles. Luminar also stands out from the crowd by manufacturing most of its own components, which are customized for its own chips and software, instead of using off-the-shelf parts.

What happened to Luminar over the past few years?

When a company goes public through a traditional initial public offering (IPO), it's not allowed to make exact long-term revenue or profit estimates. But when it goes public by merging with a SPAC, it's allowed to provide detailed expectations for the next few years. That's where a lot of SPAC-backed companies get in trouble by overpromising and underdelivering.

Their valuations initially skyrocket as its early investors take those estimates at face value, but they crumble when they miss the mark. Luminar actually exceeded its original expectations in 2021 and 2022, but it completely overestimated its ability to more than triple its annual revenue from 2022 to 2023.

Data source: Luminar.

Two challenges caused Luminar to miss those estimates for 2023. First, Volvo delayed the launch of its EX90 SUV, which uses its lidars, from 2023 to late 2024. Second, rising interest rates chilled the EV and autonomous vehicle markets.

Luminar also originally expected to achieve a positive gross margin of 22% in 2021, and to more than double that figure to 51% in 2023. But as of this writing, Luminar's gross margin is still negative. At the end of its latest quarter, it was shouldering $661 million in total liabilities, but it only held $114 million in cash and equivalents.

What could happen to Luminar over the next three years?

From 2023 to 2026, analysts expect Luminar's revenue to grow at a compound annual growth rate (CAGR) of 44% to $208 million as Volvo ramps up its EX90 deliveries, it attracts more automakers, and the autonomous vehicle market expands. And that might just be the beginning: Mordor Intelligence expects the global lidar market to expand at a CAGR of 20% from 2025 to 2030 as the macro environment warms up and automakers roll out more semi-autonomous and autonomous cars.

With an enterprise value of $773 million, Luminar still doesn't look like a bargain at 11 times its projected sales for 2024. But assuming it matches analysts' estimates through 2026, continues growing at a CAGR of 20% over the following two years, and maintains the same enterprise value-to-revenue ratio, it could be worth $3.3 billion by 2028. That would be a nice four-bagger gain in just three years. Even if it trades at a more reasonable 5 times sales, its enterprise value could still more than double to $1.5 billion. However, analysts also expect it to stay deeply unprofitable for the foreseeable future.

Luminar has made a lot of progress in the lidar market, but it still seems more like a start-up than a publicly traded company. Its high valuations could limit its gains over the next three years, and it could struggle to prove its business model is sustainable.