What’s the “L5 Revolution?” That’s the next big step forward in autonomous driving, when cars begin to be “highly automated” under most conditions — and Charles Mizrahi has a teaser pitch out for the company he thinks will get us there, dangling his “No. 1 Autonomous Vehicle Stock of the Decade” special report for those who are willing to sign up for his entry level newsletter Alpha Investor ($47, renews at $79).

As with most publishers, the nice thing about the “entry level” or “front end” newsletters is that they’re relatively inexpensive and they offer refunds, making it easy to buy… the annoying thing is that they funnel you into the most aggressive part of the massive marketing machine, because the primary reason for existence for a $49 newsletter is to help identify folks who are willing to pull out a credit card, and eventually upsell them to the “back end” $5,000 newsletter where the publisher’s profits are made. Oddly enough, since those lower-cost newsletters are also generally more sober and less speculative than the high-end services, which seem to feel like they have to recommend moonshot ideas or illiquid penny stocks to justify their high-priced existence (which almost guarantees a bad ‘batting average’), they also tend to get better reviews from our readers — as long as you can stand the relentless upsell pressure.

But anyway, what’s this “Level 5” that Mizrahi is talking up?

SAE International, the Society of Automotive Engineers, has designated six levels of driving automation (0-5), and Level 5 is not really viable yet… but it is inching closer, and is essentially what people mean when they talk about fully autonomous cars, with the driver not having to pay attention at all, no matter what the conditions are on the road.

The most advanced commercial cars right now are level 3, when the driver has to be on standby to take over whenever the car’s computer signals it needs help, but even that is a pretty remarkable step up from the level 1 and level 2 systems that most of us are familiar with, the driver assist features like adaptive cruise control and lane adjustments that have to be constantly monitored by the driver, with hands on the wheel. Level 4 essentially takes you to full autonomy, but only in controlled conditions (like in a city that the car “knows”, or on certain highways), and Level 5 is that “go anywhere” autonomy that doesn’t care if the lane markings are clear or the GPS data is out of date, and doesn’t even need a steering wheel to be installed.

I have no idea how long it will take to reach that level, partly because the variety of truly unpredictable and poorly mapped or marked roads is still quite remarkable, even in the US, and because truly autonomous cars will have to still interact with sometimes erratic human-driven cars for the foreseeable future, but we’re obviously headed in that direction — the debate is mostly about whether it will take a few years or a few decades to get there.

And Mizrahi thinks its the “eyes” of the car that will make the difference, so what he’s pitching today is his favorite of the new crop of LiDAR companies — the companies who are making what until recently were extremely expensive, bulky and impractical laser mapping systems cheaper and more viable for regular passenger cars.

That’s not so new, of course, we’ve been watching the constant parade of hype about next-generation LiDAR systems since the first two SPAC LiDAR mergers (Velodyne (now VLDR) and Luminar (LAZR)) hit the market last year and helped to ignite investor interest both in autonomous driving and in SPAC deals more generally. Mizrahi says that there are 75 LiDAR companies operating now, which I would assume must also include the established auto suppliers who have lower-profile LiDAR products (like Bosch, etc.), whatever early-stage companies are trying to take the next leap forward, and the half-dozen or so “pure play” LiDAR companies who are now publicly traded.

But which one does he like? Let’s run down the clues that he drops…

“LiDAR finally makes financial sense.

“Now, to be clear — $1,000 is still a little pricey for mass production. As in for personal use.

“And that’s why I’m so excited to tell you about a LiDAR company I’ve been following.

“You see, this company has created a LiDAR that can fit in the palm of your hand … and… it costs as low as $400.

“And…

“They’re aiming for $100 in the very near future.”

OK, so that’s promising — it doesn’t get down to the level of the camera and radar systems used by folks like Tesla (which has so far eschewed LiDAR), so we’ve got a ways to go before these kinds of systems can be ubiquitous (those prices are generally for a single sensor, and 360 degree coverage would require four or five sensors for most cars, as well as a fast and nimble “brain” to interpret the data instantly), but $400 is a lot cheaper than these systems used to be.

Mizrahi sees a big market for autonomous vehicles, going from 6,000 units to over four million over the next decade, so I guess you can spitball your own numbers from that — there aren’t likely to be four million autonomous vehicles on the road if the LiDAR sensors run to $1,000 per car or more, but maybe they get down to $300 per car over the next few years? $300 times four million is $1.2 billion, so that’s not a crazy windfall but is real money even for fairly large auto suppliers (industry leader Aptiv (APTV), for example, has revenue of about $14 billion a year), and would be huge for any of the younger LiDAR hopefuls (even the most mature LiDAR company, Velodyne, is still well under $100 million in annual revenue).

And Mizrahi talks about how he narrows down that big list of LiDAR hopefuls to make his pick…

“… there are a lot of LiDAR companies out there right now.

“Forbes reports there are over 75 LiDAR companies alone … focused on cars.

“… that’s where my four decades of experience in analyzing companies comes in. When I research a company, I’m looking for three things before I put a dime into it.

“The company has to be in an industry with a tailwind, run by a rock star CEO, and trading at a bargain price.”

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Those criteria are all a bit squishy, of course, and every player in the industry has the same tailwind, but that’s a start. What does he say about his particular favorite?

“I’ve been following this industry for a while now … and there are only a few companies that caught my eye. And one in particular really stands out above the rest because everything lines up.

“It’s currently the leader in solid-state LiDAR technology….

“Solid-state is a technology where there are no moving parts. And not only is it safer, it’s more durable, it takes up less power and it’s cheaper.

“That’s one of the reason BMW has already partnered with this company.

“What’s more — it’s got partnerships with four of the leading tier-one OEMs.”

Car companies don’t make many of their own components, so by “tier-one OEMs” he means the big auto parts suppliers. A “tier one” original equipment manufacturer in electronics might be a consumer brand, like Apple or Samsung, but in autos, with each car including tens of thousands of individual parts (an iPhone has fewer than 100 parts and components, for comparison’s sake), it would extend to include big suppliers who assemble large components or subsystems, like Bosch, Aptiv, Magna, Continental or Borg Warner (or dozens of others, those are just the familiar names that pop to mind).

So the big brand connection is BMW in this case, which is good, since the luxury carmakers tend to be first to release new technologies… but those tier one partners may well be companies whose names don’t roll off the tongue as easily. Though Mizrahi does note, in picking this stock over others, that “The other LiDAR companies can’t scrape together a deal with more than one OEM.”

What other clues do we get? He drops some hints about the leadership in getting to that “rock star CEO” criteria…

“This CEO served as an officer in an elite intelligence unit before building his LiDAR company. In fact, this company’s executive team is made up of a lot of alumni from that same unit….

“… this agency has a history of alumni who start tech companies. In fact, they’ve launched hundreds of startups. Many went public and now trade on the Nasdaq, and others have been acquired by tech giants such as Microsoft.”

And there are a few more clues dropped, but that’s enough for us to feed to the Thinkolator… that “elite intelligence unit” is Israel’s Unit 81, a technology R&D group whose alumni have built a bunch of Israeli tech companies (including Gilat (GILT), which gets teased for its satellite antennae every now and then), and the company being teased is almost certainly Innoviz Technologies (INVZ), which says a quarter of its R&D employees are Unit 81 alums (in addition to the three co-founders, all C-suite execs).

And yes, Innoviz is one of the half-dozen or so LiDAR companies that came public through a SPAC merger over the past year — and there are likely more to come (Luminar (LAZR) and Velodyne (VLDR) started the parade last year, this year we’ve seen Ouster (OUST), Innoviz, AEye (planning to merge with CF Finance Acq. Corp III (CFAC)), Aeva (AEVA), Quanergy (merging with CITIC Capital (CCAC)) and the newest one, announced last week, Cepton (merging with Growth Capital Acquisition (GCAC)). All of those, as well as other smallish LiDAR hopefuls like Microvision (MVIS), have lost some of their allure in recent months — of the SPAC “IPOs” (everyone in that list except MVIS), only Luminar is still trading above the original $10 SPAC merger valuation price, thanks partly to their leading position with Volvo, which is planning to include Luminar’s LiDAR sensors in their flagship electric SUV that will be unveiled next year… and the only one of the group with any history of commercial products or revenue, Velodyne Lidar, which essentially invented the technology decades ago, has been distracted by a fight between its founder and the new SPAC-generated Board of Directors.

So other than Luminar, which launched with the most fanfare thanks to its wunderkind founder and a Peter Thiel connection, you can buy most of the LiDAR hopefuls for less than ten bucks — and, it so happens, Innoviz is the cheapest of them all at the moment, at about $8.25 (that doesn’t necessarily mean this is the least favored of the bunch going forward, it might be that the SPAC terms were just a little too generous… and the companies that have not yet completed their SPAC merger might still just be propped up by the ~$10 SPAC redemption potential).

Still, it’s not really “cheap” in any conventional meaning of that term — it still carries a billion-dollar valuation, faces lots of competitors both public and private, and isn’t expected to generate meaningful revenue for at least a couple years (they have one of the more mature deals with a carmaker, that deal with BMW that they agreed to in 2018, and think their first product will be on the market in 2022 — and they do have an order book of $2.4 billion, mostly from BMW, but that’s just “modeled lifetime revenues” from the contract, none of that is guaranteed or on a predictable timeline).

Just to dot the i’s on those clues, we should note also that yes, Innoviz does have partnerships with four different Tier 1 parts suppliers, and particularly important ones with Magna, which is really their manufacturing partner, and Aptiv, which is a leading autonomy provider for several automakers (the others two are Hirain and Samsung/Harman). If you want to get a handle on how they think of themselves as market leaders, their Investor Day Presentation from a couple months ago is a good place to start.

Their goal is to launch with BMW and others, with sensors and their Perception software that enable Level 2 autonomy more safely and affordably (basically, collision avoidance and adaptive cruise control), but then allow software upgrades to reach Level 3 autonomy with those same sensors as the software improves and is proven out with real-life conditions over time. The second go-to-market deal they have is with a Korean company trying to make autonomous shuttles, and they have designs on other markets, too, including drones and trucking and full robotaxi autonomy, but it’s somewhat reassuring that they’re starting with the technology that’s mainstream now and mostly trying to improve it.

Will Innoviz’ Solid State LiDAR sensors end up winning the day? Or will it be Luminar or Ouster or someone else with a slightly different approach? Will we end up with a dozen meaningful LiDAR sensor providers who compete on price and all end up with disappointing margins a decade from now? I don’t know. All I can tell you is that Mizrahi seems to be picking Innoviz as his favorite, and they do have some appealing early-stage partnerships with major players in autonomous vehicles.

If you like the potential but would prefer a levered bet, incidentally, Innoviz still has warrants available for trading. Those have the ticker INVZW, and owning a warrant gives you the right to buy INVZ for $11.50 (the “strike price”) anytime before the expiration date (April 2026, five years after the SPAC deal was finalized). Like every SPAC warrant I’ve seen, they can be redeemed early if the shares stay above $18 for a few weeks (20 days in any 30-day period), so you do have to watch your mail — they can redeem for a penny if you ignore their warnings, regardless of the market value, or, if they don’t need the cash from redemptions, they can choose to do a cashless exercise and just turn your warrants into shares at a fair value. If you assume that INVZ eventually gets to $18, and that you act to redeem or sell your warrants at that point, from the current price of $1.60 the potential return is about 300%, while if you bought the stock itself at $8.25, a run to $18 would be a return of about 120%. The downside is similarly levered, of course — if the price remains below $11.50 for the next five years, you might get a small profit on the shares but the warrants would expire worthless, you really need the shares to hit $14 or so before the warrants begin to provide a better return than the common shares.

Personally, I find all of the LiDAR companies interesting… but haven’t ever really gotten comfortable enough with the prospective financials to buy shares of any of them. These are generally 2025-2030 stories, and are highly dependent on getting a few high-volume deals with major automakers, any of whom could change their models or change their minds about suppliers. I find Innoviz somewhat appealing, but not enough to buy… maybe just because it’s so unusual to see five or six new companies all hit the markets at roughly the same time, trying to do the same thing, and with all of them years away from being commercially viable. This is what I said about this segment of the market back in March, when Ian King was pitching a LiDAR name with his Mobility as a Service (MaaS) tease, and my opinion hasn’t really changed:

The ones that strike me as having the most interesting pitch and potential relative to their current valuation, and this is based on just reading through their various presentations, are Innoviz and Ouster. They all claim superiority or a “special sauce” with better sensors or better software or better partners that makes them a better bet, but with the huge shifts in this business likely over the next five years you’d have to either have quite a bit of hubris or a very deep knowledge of the business and relative appeal of these different systems to have any confidence that you can pick one real “winner” from this group (if you think you’re there, please share your thinking in a comment below). And if you ask me on a different day, I might put Aeva at the top of that list, it’s very subjective. I can’t imagine placing a bet on Luminar at current prices, not with that wild valuation — but, well, the market is very clearly telling us that Luminar is the best growth story, and sometimes the market ends up being right in the long run.

If you forced me to decide, I’d probably still pick INVZ or OUST among the LiDAR names… but I’d probably also choose either Aptiv (APTV) or Magna (MGNA) as mature companies and large, profitable plays on advancing autonomy and the increasing complexity of automobiles, before buying one of the more speculative LiDAR pure plays (I don’t own any of the companies mentioned above, just to be clear). So what say ye? Have a favorite among the seven or eight publicly-traded LiDAR companies? Think the winner will come from software, or hardware, or that LiDAR will just end up being another generic auto component? Let us know with a comment below.