You don’t need to be an expert in tasseography to understand that autonomous driving innovations as a business concept is the future. Honestly, I’m not 100% sure if the technology will become mainstream and practical in my lifetime. However, that’s not going to stop companies like Velodyne Lidar (NASDAQ:VLDR) from forging ahead. Plus, with automakers like Tesla (NASDAQ:TSLA) pumping millions into autonomous research and development, you can see why many are excited about Velodyne stock.
First, let’s briefly cover what makes VLDR so special. As I mentioned with my write-up for Gores Metropoulos (NASDAQ:GMHI), which will have a reverse merger with competitor Luminar Technologies, lidar (which stands for light detection and ranging) is an advanced system that utilizes electromagnetic radiation signals to ping off objects. From there, the system calculates distances based on how long the initial signal takes to return.
Because the speed of light is constant, lidar systems are incredibly accurate. As well, because the system relies on laser signals, it works better in inclement lighting conditions, where certain environmental factors – such as blazing hot sunlight – can obfuscate camera-based autonomous systems.
In fact, a Tesla vehicle crashed into a tractor-trailer in 2016 when its Autopilot feature couldn’t detect the trailer from the bright sky. Because lidar systems actively “touch” surrounding objects, in theory, Velodyne stock is levered to a superior autonomous technology.
However, that theory has not necessarily translated well in the investment market. As you can see if you pull up the chart for Velodyne stock, it’s had a wildly choppy ride since its introduction. What’s more perplexing, VLDR really shouldn’t be this volatile.
Recently, the company made news when it announced a sales agreement with Baidu (NASDAQ:BIDU). According to the deal, Baidu will utilize Velodyne’s Alpha Prime sensors for “autonomous applications.” It should be a big win for Velodyne stock and shares briefly jumped higher.
But soon after, VLDR went negative. Overall, the trend has been ugly since early September. Why?
Science of Velodyne Stock Outpaces Infrastructure
Don’t think I’m picking on VLDR. When you pull up the chart for Gores/Luminar, it looks roughly the same. GMHI shares skyrocketed up to mid-September and then promptly cratered. Now, shares are desperately hanging onto a critical support line.
In both cases, the science is undoubtedly compelling. Sure, you can get into the argument about which one is better. On paper, it seems as if GMHI may have an edge based on the underlying company’s claims that it has addressed some of the flaws of traditional lidar systems.
But even if we were to wholeheartedly take that approach, it still doesn’t explain why the two securities have similar trends. In my opinion, the innovation underlining Velodyne stock (as well as the competition) may be getting ahead of itself.
A Matter of Scale
Here’s what is identical about Velodyne and Luminar: they’re not engaged in this space for giggles. They genuinely believe that autonomous driving technology can go mainstream. Logically, then, they’re not just thinking about science but also about scale.
But that’s exactly where the problem comes in. What happens when millions of these lidar-armed cars are driving around our cities? As I stated earlier, lidar is an active system so in some way, the emitted lasers interact physically with the environment. And that poses the risk of interference, which could result in unintended consequences.
Now, before you engineers start filling up my inbox with hate mail, allow me to caveat the above. Technically, lidar systems can implement randomized pulse modulations so that systems can recognize their own return signals. As well, engineers can integrate algorithms that allow their systems to filter out foreign signals, including lasers from competing lidar-based systems.
To put it simply, lidar companies can effectively use different musical instruments playing different notes at different octaves. Theoretically, this should allow lidar systems to “hear” and recognize itself compared to other competing notes.
But I’m not sure if this mechanism has been tested in real-world conditions at scale. And I’m pretty sure we’re going to need those tests (and lots of them) before governments allow driverless cars to roam freely. Perhaps the reality of scaled-up autonomous driving is weighing on Velodyne stock.
Assistance Is a More Practical Avenue
As I mentioned with Luminar, I believe Velodyne stock is best served if the underlying company pursues driver assistance rather than autonomy. After all, with lidar and subsequent improvements to it, you have world-class tracking and distancing accuracy.
What you don’t have, though, is true optics. Again, in theory, a camera system like Tesla uses will one day be able to read traffic signs. In contrast, lidar is about data interpretation. Certainly, it can detect objects and predict their movements with uncanny accuracy. But it’s not going to recognize a detour sign, only that a sign exists.
Thus, lidar is much more practical as a driver assistance platform. But that’s not a sexy narrative for Velodyne stock. Still, I wouldn’t be against a small, speculative position in VLDR because innovations are constantly sprouting up. Just be aware that at some point, the science might hit a wall as the infrastructure struggles to keep up.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.