Over the past 12 months, investor optimism toward electric and autonomous vehicles has expanded from manufacturers to suppliers. Among those suppliers, Luminar Technologies (NASDAQ:LAZR) stock has perhaps the most intriguing story.

To be sure, LAZR stock isn’t cheap. At a current price of $31, Luminar has a market capitalization over $10 billion. It’s certainly fair to ask if the stock should trade above $30 given that Luminar was willing to execute a merger at a price of $10 per share less than a year ago.

That said, this has not been a market where valuation concerns have been paramount. That’s been doubly true for auto-tech names. Many companies that, like Luminar, went public via SPACs (special purpose acquisition companies) have seen their share prices move just as far, if not farther, from the merger price.

From here, those valuation concerns shouldn’t be ignored. But investors who still see upside in the sector should have LAZR stock on their watchlist.

The Case for LAZR Stock

Autonomous vehicles are on the way. They may not arrive as fast as some believe, but they will arrive at some point.

When that day comes, Luminar seems well-positioned to capitalize. The company is an early leader in lidar (light detection and ranging) technology. Most importantly, as management has detailed in the past, Luminar has a big edge: it’s built its system from the ground up.

That’s a big competitive differentiator in the space. A lot of newer, supposedly high-tech companies, whether in autonomous or electric vehicles, have proven themselves to be not much more than assemblers. Nikola (NASDAQ:NKLA) has proven to be an example.

That intellectual property gives Luminar an important head start — and prevents rivals from catching up. With 50 commercial partners already, including a number of OEMs (original equipment manufacturers), Luminar might well have the best chance of being the industry leader over the long haul.

It’s not just autonomous vehicles, either. ADAS (advanced driver-assistance systems) represent a reasonably large market in the meantime. Right now, Luminar estimates its total addressable market at about $4 billion. According to the merger presentation, by 2030, thanks to ‘robotaxis,’, commercial vehicles, and ADAS, the company believes its total addressable market will reach $150 billion. Solid share of that market will make the current $10 billion market capitalization likely look cheap in retrospect.

What Goes Wrong

As always, there are risks.

One key question is whether lidar indeed is the right technology. Certainly, OEM partners seem to think so. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) unit Waymo has focused on the technology as well, even selling its own lidar sensors.

But not everyone in the autonomous space agrees. The most notable dissenter is Tesla (NASDAQ:TSLA). Tesla chief executive officer Elon Musk famously said at his company’s 2019 Autonomy Day that “lidar is doomed.”

For now, Musk essentially is on an island. But TSLA bulls, or simply those investors who believe in Musk’s genius, might want to look beyond LAZR stock. At the least, Luminar is highly unlikely to have Tesla as a customer any time soon, if ever.

If lidar indeed is the future, there’s the competitive environment to consider. Again, Luminar does seem like the early leader, but there is no shortage of rivals. Waymo and General Motors (NYSE:GM) unit Cruise will have their say. Velodyne Lidar (NASDAQ:VLDR) just raised capital through its own SPAC merger. In the start-up world, there are “too many lidar companies,” as Wired put it a year ago.

The rewards in LAZR stock could be enormous if lidar indeed is the right technology and if Luminar indeed becomes the industry leader. Neither is guaranteed.

The Valuation Question

Finally, there’s the question of how much of the potential reward has been eaten up by the stock’s 200%-plus rally since November. LAZR stock isn’t cheap.

Indeed, using projections from the merger presentation, LAZR trades at nearly 30x estimated EBITDA (earnings before interest, taxes, depreciation and amortization) for 2025. Those projections hardly look conservative, with Luminar expecting revenue to rise 575% just between 2023 and 2025.

If Luminar meets its projections, no doubt LAZR stock rises. But that’s true of just about every stock in the market. Some skepticism is warranted.

As a result, it wouldn’t be surprising to see a further pullback in LAZR, which already has retreated from December highs above $45. That said, the valuation can work if the story plays out.

It’s a bit too simplistic to argue that small market share can lead to big returns — because it’s not easy to get even small market share. But, back of the envelope, 10% market share at 2030 suggests revenue of $15 billion. Forty percent margins (equivalent to those projected in 2025) would get EBITDA to $6 billion.

Again, that’s easier said than done. Competition may lead to sharply lower prices and sharply lower margins. Luminar may never gain much share at all. But in that back-of-the-envelope model, Luminar probably has a market capitalization exceeding $100 billion — which puts LAZR stock above $300. Few stocks have that kind of potential.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.