AUR - Aurora Innovation: Spinning Its Wheels In A Profitless Pit

2023-10-05 15:17:41 ET

Summary

• Aurora Innovation, Inc.'s income statement is in a state of flux, with revenues and expenses fluctuating significantly.
• The company's net loss has increased, but its revenue has also grown.
• Despite the uncertain income statement, Aurora Innovation remains an attractive investment opportunity.

Investment Thesis

Aurora Innovation, Inc. ( AUR ) has a mighty compelling narrative that seeks to deliver the benefits of full self-driving ("FSD") technology safely, quickly, and broadly.

The problem here is that beyond its seductive narrative (which it truly is), there are just too many questions and too much uncertainty in its prospects, including an intensely competitive sector.

Additionally, with a market cap higher than $3 billion, I find it difficult to recommend Aurora Innovation as a suitable investment for readers, particularly given that Aurora Innovation has no plan to reach breakeven on its free cash flow line for another four years.

Why Aurora Innovation? Why Now?

Aurora is a company that specializes in the advancement of self-driving technology. Its core mission is to deliver the benefits of autonomous driving in a safe, rapid, and widespread manner. Aurora is renowned for its development of the Aurora Driver, considered one of the world's most advanced and scalable self-driving hardware and software platforms.

The unique selling point of Aurora is its methodical approach to developing a flexible platform that can be adapted to a range of vehicle types and applications, including passenger vehicles and commercial trucks. This flexibility puts the business in a favorable position to pursue a variety of sectors, such as trucking, passenger mobility, and local goods delivery.

The company's value proposition centers on enhancing road safety and increasing transportation efficiency. By introducing self-driving technology to the trucking industry, Aurora seeks to address driver shortages, reduce transportation costs, and enhance safety.

Furthermore, for passenger mobility, the company plans to offer ride-hailing services powered by autonomous technology, providing a more efficient alternative to conventional manual transportation. Additionally, Aurora anticipates significant demand in local goods delivery going forward.

Through strategic partnerships with industry leaders such as PACCAR ( PCAR ), Volvo ( VOLVF ), Toyota ( TM ), and Uber ( UBER ), Aurora aims to commercialize its technology through a Driver as a Service (''DaaS'') business model.

This strategy enables Aurora to focus on its core competency—developing self-driving technology—while collaborating with partners to manage other aspects of the business.

As you can see, there are many of positive aspects to this narrative. The issue is that when we go behind its narrative, we are forced to confront its fundamentals.

Topsy-Turvy Income Statement

Let me cut to the chase here. Aurora guides that for its upcoming quarter, it will burn through approximately $180 million of free cash flow. That's after the more than $300 million Aurora invested into its business in the first 6 months of the year.

Put more simply, Aurora will burn through approximately $600 million of free cash flow in 2023. For a business with a market cap of more than $3 billion to be burning through these levels of capital, it feels both astonishing and impressive.

And what makes matters even more challenging for investors, is that as of yet, for 2023, Aurora has no revenues. In fact, Aurora openly contends that it won't break even on its free cash flow until the back end of 2027.

I'm all up for investing in a pre-revenue business. In fact, I'm invested in Enovix Corporation ( ENVX ) a business that's also pre-revenue. But with Enovix, the business is already expected to be delivering reasonably strong free cash flows by 2026 -- more than a year earlier than Aurora is expected to reach breakeven (disclosure: I'm long ENVX).

Balance Sheet Must be in Focus Before We Move Forward

Subsequent to the quarter ending, Aurora had a capital raise. This left its balance sheet with around $1.6 billion of cash. However, as discussed above, the business isn't expected to break even on its free cash flow line for another 4 years.

Naturally, this means that the capital raise that Aurora had isn't expected to last long. In fact, Aurora admits that it will need another capital raise in less than two years' time.

What's more, Aurora Innovation's primary challenge lies in the highly competitive self-driving technology industry.

With several major players such as Waymo ( GOOG , GOOGL ), General Motors (GM) Cruise, Tesla ( TSLA ), and others vying for dominance, the competition in this space is fierce. These competitors not only have significant financial resources but they too are also aggressively investing in self-driving solutions, and these companies are no pushovers.

Finally, in this higher interest rate environment and when taken together with this cutthroat competition, Aurora needs to not only innovate but also execute its strategies efficiently to stay safely on the road.

The Bottom Line

I believe Aurora Innovation presents a tantalizing narrative centered around the promise of self-driving technology and its potential to revolutionize transportation.

The company's focus on safety, scalability, and adaptability in developing the Aurora Driver sets it apart in the industry. Aurora's strategic partnerships with established players seem promising for the future.

However, when we shift our focus from the compelling Aurora Innovation, Inc. narrative to the financial fundamentals, some concerning issues come to the forefront.

Aurora is burning through significant amounts of cash, with projections of continued losses until at least the end of 2027. The recent capital raise brought in around $1.6 billion, but this is expected to be depleted in less than two years.

In a highly competitive field with formidable rivals like Waymo, GM Cruise, and Tesla, Aurora faces an uphill battle. The combination of intense competition and the need for sustained capital raises makes it a risky investment, especially in a higher interest rate environment.

While the story is enticing, the road ahead for Aurora Innovation appears fraught with challenges.

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