Ouster is a hold, wait and see: a 30% ten-year revenue CAGR, 20% free cash flow margin and 20X exit multiple scenario implies fair value near $41, leaving much optimism priced in and upside too slight for small-cap risk; it may be a relative value to peers, and a pullback toward $30 or lower would warrant a fresh look.

Okay, me and the dog are settled in and ready for a research project on Ouster, ticker symbol OUST, a LiDAR company we've talked about for some time now. Part of our small bets basket of companies.

First as an intro though on Ouster, they are an IDM, integrated device manufacturer. They are utilizing a bit more of that hybrid model like a lot of other IDMs where they outsource some manufacturing.

So as a LiDAR company, we would traditionally categorize them down here in auto and industrial. Oftentimes used a lot in self-driving car technology. Not Tesla obviously, but more like Alphabet's Waymo.

But in recent years, LiDAR is getting used a lot more in actual industrial end markets like aerospace and defense. A lot of drone technology is making use of LiDAR. And so as accelerated computing and AI gets better in the data center and a lot of real world AI models get trained, that is starting to have a trickle-down effect down here into auto and industrial.

So that's where I would categorize Ouster, and this appears to be a new growth cycle for those markets. It has finally bottomed and started to inflate higher.

I have a company analysis page pulled up for Ouster, and I want to start with their recent slides from Q2 2026.

Here's the more important slide. We talked about color LiDAR a few months ago. We had a blog post about that, and it seems that this new technology that would be a bit of a competitor with CMOS image sensors from Sony Semiconductor is starting to have a positive effect.

Revenue growth rate well over 50% this last quarter, 56% growth year over year to 55 million, and some really positive items that indicate this company has the ability to scale to profitability as it gets larger.

Gross margin was at 49%. That's on a GAAP basis. You exclude some of the non-cash expenses. You get non-GAAP gross margin of 53%. That's the good news here and also indicative of this business maturing and the LiDAR technology itself maturing.

Manufacturing scale is starting to get more efficient. Notice the more than tripling in sensors and LiDAR sensors shipped compared with Q2 2025. 5,500 last year. We discussed it last summer, over 17,000 sensors shipped this time, and yet the revenue only increased 56% year over year.

That means average selling prices are plummeting rapidly. Normally that would be bad for business, but for semiconductor technology, that's actually a really good thing because when you're early on in the adoption of a new tech, you want the average selling price to drop because it increases the uptake from customers.

That's the basically Jevons paradox real world example here. The lower price per sensor is so much that customers are more than making up for that by buying more and more sensors, which still ultimately leads to higher revenue and higher profitability for the selling company.

Now we are going to get a bit of a sequential quarter-over-quarter slowdown. The guidance for Q3 is at the midpoint about 56 million in revenue. Let's just call it essentially flat with Q2.

Maybe they outperform again. We are going to get a bit of seasonality here with the business.

Yes, we are going to get a bit of sequential slowdown, but Ouster has pulled off its goal the last couple of years of growing in the 30% to 50% revenue growth range and getting gross margin above that 35% to 40% target.

They're now well in excess of that. Having it closer to 50% means the company is on a path to profitability because all the while they have been able to maintain control of operating expenses.

There in the bottom right. Less than 5% increase in GAAP operating expenses over that period of time.

but let's jump to the financials and talk about the trickiness with valuing a company like Ouster because they are on a path to profitability. But what you're really purchasing right now is all that revenue growth and the expectation that they expand to 100 million in quarterly sales, a billion in quarterly sales, grow themselves into a really, really large supplier of semiconductor sensors and edge AI. How do you actually value a business like that?

which captures the merger with Velodyne back here, the traditional lidar company. In December 2025, they had the big benefit from getting some licensing payout from Hesai. We covered that a couple quarters back if you're curious about what happened here. But there's the nice scale up of revenue.

And under ratios, I'm going to select operating margin and free cash flow margin. And this is pretty ugly, right? Ouster is not going to win any beauty contests among value investors especially.

GAAP operating margin at negative 36.7%. Free cash flow margin only slightly better when you back out the mainly stock-based compensation and amortization expense from some recent acquisitions, like the recent acquisition of Stereo Labs. But still, negative 28%.

Let's get to the question then. How do you value a company like this? You could use price-to-sales ratio, but that is not super useful for a high-growth business. It's sort of just a relative valuation metric that the market is really good at arbitraging away any opportunity there.

Basically, what happens is if you have a bunch of companies with comparable business models, the higher the growth rate, the higher the price-to-sales ratio. The lower the growth rate, the lower price-to-sales ratio.

And the majority of the time, you're not ever going to find much disconnect there between those two metrics. So what else can we do?

Let's assume maybe they can hit free cash flow per share profitability first. I remember the EPS currently is a bit higher because of that licensing payout from Hisai a couple quarters ago, but that will revert here over the next two quarters to free cash flow per share being higher.

So let's just say that they're able to scale to a dollar per share in free cash flow per share over the course of the next 10 years. If they were generating free cash flow per share of a dollar today, what growth rate would they have to generate over the next 10 years to be fair value, 11% CAGR.

Okay, that's all fine and well, but the problem here is they're not generating a dollar in free cash flow per share. So what actually does that mean? What does the free cash flow profit margin have to improve to over the next 10 years to make this scenario true?

Ouster remains loaded up. I'm gonna come back to this chart in just a moment. I wanna show you this first, all the way at the bottom. Here is some peer group benchmarking. Not all of these are going to be an exact match.

But all of these companies that default here are similar to Ouster, like Hesai or Aeva Technologies, or they are also some sort of IDM business where there's some design and some manufacturing built in.

And here's where you can see the price to sales differential between these companies, like Ouster and let's say, an old imaging company and camera company like Teledyne. See the difference here with Ouster price to sales ratio roughly 3X.

But you see the premium you get in Ouster because of the dramatically higher revenue growth rate. So you can use this tool to do some peer group assessment. It might not be super useful for companies like Ouster, Hesai, and Aeva because they are somewhat unique assets in an emerging growth industry.

And so you have some wonky things happening, but we'll have some other more meaningful companies where we'll use this tool later on.

Perhaps after a bit of a sell-off, this would be indicative of maybe a slight discount to some peers for the amount of growth Ouster has been generating, perhaps. But it would appear the market is discounting that revenue growth a bit because, again, in the December 2025 quarter, they had that big influx of licensing revenue that is skewing the actual revenue growth rate higher than it really is. It should be normalized, maybe high 40% range.

The way this works is it will help you figure out what the normalized earnings per share, if you want to use net profit margin or normalized free cash flow per share would be today at a given profit margin, give you the normalized price to free cash flow or price to earnings ratio today if the company was generating that profit, and then the implied value at a given exit multiple some years from now, in this case 10 years.

So let's increase that to 10 years like we did in the reverse DCF. And now let's solve for that. The dollar per share, I just picked an arbitrary number. For target free cash flow margin or net profit margin, GAAP net profit margin.

We like using twenty percent free cash flow margin as a benchmark. Let's bump the exit multiple up just a bit to start off. And then revenue growth rate over ten years, obviously 63% would be way too high.

I'm gonna move this down to 30% to the bottom of their stated growth range. Unfortunately, the share dilution at 2% per year probably needs to be about higher than that given where the business is at right now.

They may have some more acquisitions over time. And basically just based off of this assumption alone in year 10, if all of this were to happen, revenue grows at a 30% CAGR over the course of 10 years, free cash flow margin improves all the way to positive 20%, and there's an exit price to free cash flow multiple of 30X, share dilution of 5% per year.

This indicates Ouster is a great purchase right now.

Now, I ran this initially with basically no margin of safety whatsoever. Let's do first margin of safety here. Let's discount that future free cash flow 10 years from now. That changes things dramatically.

If we discount it at a 10% rate, we still have some additional upside over and above a 10% per year, minimum bar of about 56%. This still indicates Ouster would be a slight market outperform, but it is a small cap, so that's probably not enough upside for the risk.

But what I wanna do next is just bake in more margin of safety, and let's reduce the exit multiple down to 20X. That about does the trick right there if we leave the discounting in place.

So this essentially is building on the reverse DCF. What needs to happen to make it a fair value today. And you get some extra context here. You get revenue growth over the course of the next 10 years, and what does the profit margin need to expand to.

This is a scenario that gets the stock to a fair value today, which happens to be almost $41 per share as of market close on September the 29th. So that gives you more context on what makes an emerging growth business that doesn't turn a profit yet and may still be years away from turning a profit.

That's just one tool. There are some additional things. You probably want to take a look at the balance sheet and judge how much cash they have versus any debt, how they've capitalized the business.

Take a closer look at share dilution. Is management still doing things like issuing new stock? Do they have an ATM program where they habitually release new stock onto the market to raise cash?

Just doing the price to sales comparison only gets you partway. This gets you a little bit further using this fake profitability. So in our assessment, based off of what we just ran, Ouster could be a relative value to some of its peers, perhaps, but it does still have a lot of optimism baked into the stock price today. 30% revenue CAGR over the next ten years, that would be a pretty epic run for the business.

Of course, they could supplement that with some acquisitions like they already have, but you would need to bake that into the scenario with perhaps some higher share dilution, more than the five percent that I had modeled.

At this point, we're still just kind of a hold, a wait and see on this. It remains in our small bets basket. If we saw a significant pullback again, which we think we could definitely see some elevated volatility and perhaps in Q1 2027, that's kind of what we're looking at as far as market volatility to the downside.

But we'll take a look, especially if that thing started to plunge towards thirty dollars per share or even lower, we would want to take a look at what was going on. Is there a business specific update that came out that caused the drop, or is it just normal market volatility doing its thing, creating the lower valuation?