Lidar stocks are hot. The question might be whether they’re too hot.

Since early November, all sorts of auto-tech plays have soared. Many of the big winners have been on the electric vehicle side of the business, but plays on autonomous vehicles have done well too. Given that lidar (which stands for Light Detection and Ranging) technology may well underpin self-driving cars, the optimism makes some sense.

But with huge rallies across the space, valuation is a question mark. That’s not the only risk. Lidar seems likely to be the winning technology, but its success isn’t guaranteed. No less an authority than Tesla (NASDAQ:TSLA) chief executive officer Elon Musk has called lidar “a fool’s errand.”

As with all growth stocks, lidar stocks aren’t guaranteed winners. But there is a strong long-term case for the group. That’s particularly true for these four names:

• Luminar (NASDAQ:LAZR)
• Valeo SA (OTCMKTS:VLEEY)
• Collective Growth (NASDAQ:CGRO)
• Velodyne Lidar (NASDAQ:VLDR)

Lidar Stocks: Luminar (LAZR)

The most valuable of the lidar stocks, LAZR is an intriguing growth play. Indeed, our Matt McCall this month called LAZR stock the best pure-play on self-driving cars.

I’m inclined to agree. Luminar has estimated that its total addressable market will reach $150 billion by 2023. That includes not only long-term growth in autonomous vehicles, but ADAS (advanced driver assistance systems) for driver-controlled vehicles.

Luminar’s tech has been built from the ground up, and a partnership with Volvo (OTCMKTS:VLVLY) puts a high-end imprint on that technology.

The worry is valuation. LAZR stock has more than tripled since November, and that rally came after two months of basically sideways trading following the announcement of a merger between then-private Luminar and special purpose acquisition company (SPAC) Gores Metropoulos.

There hasn’t been much in the way of news that supports that rally; instead auto-tech stocks simply have gone a little nuts. For investors who believe the market was simply late to the story, LAZR stock is intriguing. For those who see signs of a bubble, patience is advised.

Valeo SA (VLEEY)

It’s fair to wonder whether Valeo necessarily should make the list of lidar stocks. Unlike Luminar, Valeo certainly isn’t a pure-play. In fact, it’s a diversified automotive supplier that should generate close to $20 billion in revenue in 2020. Only a minimal portion of that revenue comes from lidar equipment.

But lidar still represents a potential catalyst for VLEEY stock. Valeo has been working on lidar since 2004. And the company expects exponential growth on a unit basis. As with Luminar, demand should further increase toward the second half of this decade.

Meanwhile, Valeo stock looks cheap, at a multiple of roughly 11x the average earnings per share estimate for 2022. That’s a multiple befitting more normal automotive suppliers — but it might not incorporate the tremendous opportunity lidar will present in the coming years.

Lidar Stocks: Collective Growth (CGRO)

Innoviz Technologies, which is merging with SPAC Collective Growth, has potential. But it’s worth highlighting two key reasons for skepticism toward the merger.

The first is that Collective Growth wasn’t designed to invest in an automotive play. It was set up by former Canopy Growth (NYSE:CGC) chief executive officer Bruce Linton to invest in a cannabis company. The fact that Collective Growth pivoted to a lidar play — and rather quickly — doesn’t provide a ton of confidence in the vetting process.

That aside, part of the appeal of the SPAC process is for the merger target to end up with a sponsor with industry experience, something which isn’t necessarily the case here.

The second, related, issue is that CGRO stock simply hasn’t done all that much. The merger was announced at $10 in December; CGRO trades around $13 at the moment.

A 25% “pop” isn’t terrible, obviously. But many SPACs have soared after their mergers were announced. That’s been particularly true in the automotive space, with Nikola (NASDAQ:NKLA) and QuantumScape (NYSE:QS) two prominent examples. The relative lack of enthusiasm toward Innoviz seems like a concern.

Still, there is potential here. Valuation is far more reasonable, with a market capitalization below $2 billion pro forma for the merger. Innoviz has a partnership with auto parts giant Magna International (NYSE:MGA), who conceivably could become a suitor down the line if the company shows promise.

Innoviz has a long way to go. But if lidar winds up being the preferred technology of AV developers, it still has a chance to provide substantial returns.

Velodyne Lidar (VLDR)

As far as pure-play lidar stocks go, VLDR might be in the sweet spot. It’s rallied more than 100% since announcing its own SPAC merger, which shows some optimism toward the company’s technology. But the stock also has been left out for the most part of the overexuberance that has greeted small-cap stocks over the past few months.

Meanwhile, Velodyne Lidar is no slouch. The company actually invented real-time three-dimensional lidar back in 2005. That “first mover advantage” is a key reason why one analyst recently picked VLDR stock as a buy in the sector.

Wall Street on the whole sees nearly 30% upside from current levels. So VLDR might be a lidar name where investors don’t have to wait until the second half of the decade to see big returns.

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