Small-cap tech company Ouster (NYSE: OUST) just got a huge boost in its share price, courtesy of the United States Department of Defense (DoD). On June 11, Ouster saw its share price rise by 27% after putting out an important press release. The DoD has tested and approved one of the company’s digital lidar sensors for use in unmanned aerial systems, also known as drones. Below is a breakdown of Ouster and the news that sent shares soaring.

Ouster: Small LiDAR Company With $70 Billion Ambitions

Ouster, an approximately $1 billion company, dubs itself as “building the eyes of autonomy." The company primarily makes digital lidar sensors. LiDAR stands for Light Detection and Ranging, which uses lasers to measure distances. Machines can use it to create a 3D map around them by understanding their relative distance to surrounding objects. Digital lidar contrasts with analog lidar, offering improved affordability, reliability, and resolution.

The company serves automotive, industrial, robotics, and smart infrastructure end markets.  Ouster also offers related software solutions. However, this part of the business is small, and the company doesn’t break out revenue figures for it.

Overall, the company believes that 3D vision technologies, combined with AI, will "power autonomy that in turn will fundamentally disrupt business models." Despite generating just $118 million in revenue over the last 12 months, the company sees a total addressable market of $70 billion across its four end markets.

Ouster Gain’s Blue UAS Approval, a Big Step Forward

Ouster’s OS1 is the specific sensor that the DoD has vetted and approved. It is the mid-range sensor in its Ouster Sensor (OS) product line, which was originally launched in 2018. It has undergone significant improvements, particularly in the custom semiconductors it uses.

The company’s website provides video of the OS1 in action across different use cases. The DoD has approved OS1 for use under the Blue Unmanned Aerial System (UAS) framework. This is very significant, as the OS1 is now eligible for purchase by the DoD with a greatly reduced administrative burden.

Getting approved under the Blue UAS requires a lengthy vetting process. This includes ensuring that the supply chain of the technology’s components does not flow through adversarial nations.

Adding weight to this accomplishment is the fact that OS1 is now the first high-resolution 3D lidar sensor approved under Blue UAS. The DoD has previously approved 2D lidar sensors. However, Ouster says its tech offers “superior performance in weight, power efficiency, and reliability under rugged conditions."

The company notes that the U.S. Army, Navy, and other entities are already using some of its technology. Thus, this new Blue UAS approval is not the start of the company’s business relationship with the DoD. However, it has the ability to significantly increase the adoption of the OS1, as it will now be much easier for DoD entities to purchase it.

The OS line isn’t Ouster’s most advanced technology. The company’s Digital Flash (DF) Series is currently in development. It is being developed to meet the needs of automakers for advanced driver assistance systems (ADAS) and for autonomous driving. It may also serve industrial markets.

The main advantage of the DF product line is that the system is “solid state”; it will have no moving parts. The OS product line and many traditional lidar systems use spinning parts to see their surroundings. Removing this reduces mechanical wear, allowing the DF line to have superior reliability and longevity.

The design is also simpler, reducing costs and allowing more efficient mass production. Ouster competitor Hesai Group (NASDAQ: HSAI) says solid-state lidar “can be well applied in automotive-grade mass production."

Ouster Gets Downgraded Despite Big News, Profitability Remains Top of Mind

Despite this strong news for Ouster, analysts at Cantor Fitzgerald downgraded the stock from Overweight to Neutral on June 12. The firm places a $19 price target on Ouster, implying downside of around 2.5% from its June 12 closing price.

Ouster’s adjusted operating income over the past 12 months is around -$85 million, and its free cash flow is -$36 million. Perhaps increased sales volume from the DoD can help the company move closer to profitability. However, the company does have $168 million in cash and short-term investments. This gives it the ability to continue operating for years to come, even without a capital infusion. Over the past three months, Ouster’s share price has risen nearly 150% as of the June 12 close.

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