AUR - Aurora Innovation: Getting Ready For Commercialization

2023-05-31 03:36:11 ET

Summary

• Aurora Innovation has made significant progress in its technology development, reaching key milestones such as completing Beta 6.0 for the Aurora Driver platform and demonstrating the ability to deliver on promises.
• The strategic partnership with Continental strengthens AUR's prospects by providing access to scalable production and cost-efficient hardware solutions while expanding partnerships with renowned freight companies showcases potential for future growth.
• Investing in AUR requires a leap of faith in management's guidance, but the company's progress, partnerships, and adherence to plans justify a positive outlook; maintaining a nimble position in the portfolio is advised.

Summary

I reiterate my buy rating for Aurora Innovation ( AUR ). My opinion has not shifted. AUR has continued to make strides in the development of its technology over the past quarter ( 1Q23 ), and the company has reached a number of technical milestones, including feature complete for the Aurora Driver. I think it's important to highlight that AUR kept to the schedule and delivered as promised, even more so than the actual completion of this feature. This gives confidence that AUR can continue to meet the stated timeline (which also means the path to commercialization is still intact). Thus, I view AUR's ability to stay on target with its prior plan as a positive, despite the fact that it still must refine and test a number of capabilities before launch. AUR has also expanded its distribution capabilities by widening its access to partners, in particular, the partnership aligns with its "pay per use" business model which eases the strain on its balance sheet from the onset. Fundamentals and long-term view aside, I would also reiterate that this is akin to investing in a start-up from a venture capitalist point of view. The basis for assuming management can hit its guidance is trusting the management, which I believe is good. As such, there is a huge leap of faith required for the business and stock to work. My best advice is to ensure this position in the portfolio is not oversized, but instead, it must be nimble enough so that it will not have a huge impact on the portfolio in times of extreme volatility. There will be plenty of opportunities to size up the position as the business continues to hit its targets and gets nearer to commercialization.

Completion of Beta 6.0 and Full Feature Availability

The release of Aurora Driver Beta 6.0 by AUR in 1Q23 was a major accomplishment, as it demonstrated the company's accomplishment of all necessary driving features for its Dallas-Houston commercial service. The system can now detect and react to a wide range of situations, including inclement weather, collisions with other vehicles, and roadblocks thanks to the new features included in this release. For three reasons, I consider this a remarkable accomplishment:

1. This success is in line with the company's prior expectation that feature completeness would be reached by the end of the first quarter. This sends a clear signal to the market that management's assurances are credible
2. Now that version 6.0 is complete, AUR can begin conducting comprehensive tests to identify the product's vulnerabilities.
3. Beta 6.0 is a milestone to achieving commercialization

Safety Case Closure and Autonomy Performance

As mentioned above, the testing can be done more holistically today. The next step in commercializing the Aurora Driver is to complete the safety case for the Dallas-Houston route. An important development is that AUR has implemented the Autonomy Performance Indicator [API], which shows that during the quarter, 96% of commercially-representative miles driven between launch terminals did not necessitate on-site support. Some bears may argue that it is not yet 100%, but I would point out that it is impractical to reach 100% due to the need for on-site assistance in some cases, such as changing flat tires (referenced in 3Q22 earnings). As such, the way I see it, I think we are getting really close to where AUR can start generating revenue soon.

Progress towards Commercial Launch and Freight Partnerships

I think all that is left now is for AUR to complete its Aurora Driver platform, which management expects to be ready by the end FY23 and commercial deployment anticipated by the end of FY24. With management claiming that AUR has reached a major milestone by successfully hauling 50 loads per week, surpassing its initial goal of 40 loads, I believe that the company is on track to meet commercialization. Looking at AUR's past accomplishments, we can see that it has partnered with major freight companies such as FedEx (FDX), Werner , Schneider , and Uber Freight , with whom it has delivered a total of 1,635 loads, traveling an impressive 455,000 miles as of 1Q23. The road map for AUR's eventual commercialization is looking good in my opinion.

Strategic Partnership with Continental

Recently, AUR and Continental announced a strategic partnership to commercialize the Aurora Driver. Assuming Aurora Horizon successfully launches in 2027, production will begin the following year. This partnership, in my opinion, allows AUR to successfully industrialize its hardware kit, laying the groundwork for a sustainable business model. In addition, Aurora is able to forego upfront capital commitments in favor of a "pay per mile" model thanks to Continental's investment in one-time engineering costs for scaling the Aurora Driver hardware. In my opinion, this is a big win situation for AUR as it will be able to scale and leverage Continental's resources without immediately exhausting its financial resources.

Conclusion

AUR has made significant strides in its technological development, reaching key milestones such as the completion of Beta 6.0 for the Aurora Driver platform. The company has demonstrated its ability to deliver as promised, which instills confidence in its ability to meet future targets and stay on track with its commercialization roadmap. The strategic partnership with Continental further strengthens AUR's prospects, providing access to scalable production and cost-efficient hardware solutions. Additionally, AUR's expansion of partnerships with renowned freight companies showcases its growing distribution capabilities and potential for future growth. While investing in AUR requires a leap of faith, trusting the management's guidance, I believe that the company's progress, partnerships, and adherence to its plans justify a positive outlook. That said, it is advisable to maintain a nimble position in the portfolio and monitor AUR's performance closely as it continues to hit milestones and near commercialization.

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