CA - Drone Delivery Canada: A Hype Growth Stock Under The Radar

Summary

• DDC is leading the way in providing drone-based logistics solutions.
• DDC's technology fills the void that the traditional logistics industry can’t.
• DDC's technology disrupts the traditional logistics industry as a whole.
• DDC faces challenges on its road to success such as competition, uncertainty in regulatory development, liquidity.

Drone Delivery Canada Corp. (TSXV: FLT.CA) and (TAKOF) (“DDC”), founded in 2014, is an early-stage technology company focused on designing, developing, and implementing drone-based turnkey logistics solutions. DDC currently operates three types of drones: the Condor, Robin XL, and Canary. Since 2021, DDC has been prioritizing the Condor (a heavy and long-distance drone that can travel up to 200 km with a maximum payload of 180 kg) and Canary (a light and short-distance drone that can travel up to 20 km with a maximum payload of 4 kg), and has been relocating resources from the Robin XL. FLYTE is DDC’s proprietary flight management software and is a critical component of DDC’s logistics solutions.

Source: Drone Delivery Canada Corp. Management Discussion and Analysis for the Period Ended September 30, 2022

DDC primarily conducts its development and early commercialization of its drone-based logistics solution in Canada. Since 2020, DDC has entered the United States to expand its business footprint.

The majority of the largest drone companies, such as Kratos Defense & Security, AeroVironment, Inc, Boeing, Lockheed Martin, and Elbit Systems, are focused on developing drones for military, defense, and emergency responses, which are extremely capital-intensive and competitive in government contracts. Few drone-based companies have gone as far as DDC in providing drone-based turnkey logistics solutions, including hardware, software, and field operations, that can fill the needs where traditional logistics solutions cannot meet and disrupt the traditional logistics industry as a whole.

The global drone market is expected to generate over $100 billion in sales by 2030, and DDC is poised to play a significant role in this growth.

Source: 15 Biggest Drone Companies In the World

In addition, DDC's disruptive technology to the traditional logistics industry will allow it to gradually take over market share from the gigantic $1.3 trillion logistics market in North America.

Source: North America Logistics Market

What are the growth opportunities for DDC in the near future?

Filling the void that the traditional logistics industry can't:

During the COVID-19 pandemic, the importance of drone-based logistics solutions that DDC provides has been increasingly realized. Traditional methods of transportation can't reach remote communities, especially in the vast land of Canada, that are in dire need of medical and other essential supplies. Traditional transportation also can't deliver products in a completely contactless manner. UAV drones not only can reach remote communities even under harsh environments, but they can also deliver products in a complete contactless manner, minimizing the risk of contamination.

The COVID-19 pandemic is not over and certainly won't be the last pandemic. DDC is leading the way in terms of drone-based logistics solutions.

Disrupting the traditional logistics industry as a whole:

Industrial business-to-business logistics often involves several layers of handling. In 2021, 3PL and 4PL make up over 60% of the $1.3 trillion market share. Drone-based logistics solutions can convert the vast logistics needs that are currently fulfilled with 3PL and 4PL services to be fulfilled by 2PL or even 1PL, saving costs, reducing complexity, and increasing reliability for businesses.

For example, company A in Ontario ships bulk products to company B in Ontario. Currently, when a shipment need arises to company B, company A contacts its 3PL partner to source a carrier, usually a truck. Company A obtains a quote from the 3PL partner based on supply and demand, insurance needs, product value, weight, fuel cost, location, and driver availability. The sourced truck comes to company A to pick up the shipment and delivers it to company B. The success and cost of this shipment fluctuates significantly each time. With drone-based logistics solutions, company A can ship the products to company B on its own without the need of a 3PL partner. The success and cost of each shipment is significantly lower and predictable.

This is only a very simple example of how drone-based logistics solutions can disrupt the traditional logistics industry in a business-to-business setting. Not to mention, drone-based logistics solutions can disrupt traditional logistics to provide last-mile delivery of products from businesses to consumers.

Revenue Growth:

Despite in very early stage of development, DDC still realized some impressive growth rate on revenue:

Notable Commercial Trial Projects:

DDC is supported by Air Canada to identify commercial opportunities for its technology. DDC has several commercial agreements in progress to test its technology and start generating revenue. DSV Air & Sea Inc, a large publicly traded logistics company with annual revenue of about US$16 billion, has a couple of commercial agreements with DDC to test shipping healthcare cargo from its warehouse in Milton, Ontario to local customers. In addition to DSV Air & Sea Inc, DDC also has commercial agreements with Edmonton International Airport, Bell Mobility, the University of British Columbia, and some First Nations communities.

Significant Barrier of Entry:

DDC holds several key patents on drone-based logistics solutions that take years to develop. Knowledge on how to navigate through Transport Canada regulations to develop commercial agreements, the relationship with key players in the industry such as Transport Canada, Air Canada, Bell Mobility, DSV, and various First Nations communities also are very difficult for competitors to replicate. DDC is leading the way in providing drone-based logistics solutions and will likely face limited competition in this specific area. With DDC's importance in providing drone-based logistics solutions and its relationship with key players in the industry, DDC should have an advantage in obtaining permits, government grants, subsidies, and partner funding or even becoming an acquisition target by one of its partners.

However, there are significant challenges ahead for DDC to succeed

DDC still faces competition from companies such as Dragon Fly in Canada and Ondas in the United States that provide drone-based logistics solutions. Dragon Fly is established in 1998 with many more years of experience than DDC. However, Dragon Fly and Ondas are more focused on the development of drones rather than drone-based logistics platforms. DDC’s FLYTE platform can actually integrate and work with third-party drones such as those from Dragon Fly. Rather than competition, DDC can grow to become a partner with Dragon Fly.

It is uncertain when Transport Canada will allow commercial drone operations beyond visual line of sight over buildings and people. Until then, DDC’s viable commercial operations are very limited. For example, a typical business-to-business drone operation managed by DDC is very labor-intensive. DDC and its clients need to have Safety Pilots at takeoff and landing locations, Visual Observers at a middle point of the route, and Cargo/Drone Handlers at takeoff and landing locations, even though the drone flight is autonomous. Until regulations ease on drone flight beyond visual line of sight, it is unlikely that such labor-intensive operations can compete with traditional methods of logistics in terms of cost and complexity.

DDC needs a significant amount of capital to execute on its business plan and achieve profitability. As of September 30, 2022, DDC has $18.2 million cash on hand. Given that DDC used about $2.6 million and $9.2 million cash in the three months and nine months ended September 30, 2022, respectively, the current amount of cash will run out by September 30, 2024. It wouldn’t be a surprise if DDC had to issue more shares to raise capital in late 2023 or early 2024. If the economy enters into a recession and faces continued uncertainty in 2023, investors will be more cautious and less willing to invest in risky ventures. DDC may be forced to issue more shares to raise the same amount of capital, significantly diluting existing shareholders.

Source: Drone Delivery Canada Corp Interim Financial Statements for the Period Ended September 30, 2022

Conclusion

DDC is a less known player in the drone and logistics industry even though DDC is leading the way to apply drone technology to fill the void that the traditional logistics company can’t and disrupt the traditional logistics company as a whole. DDC has built a turnkey drone-based logistics solution that is being tested in real business environment with notable partners such DSV and Bell Mobility. When regulations change in Canada and/or the United States to allow drone flight beyond visual line of sight for commercial operations, DDC’s solution will certainly become very competitive to a larger audience that currently relies on the traditional logistics industry. However, given the current economic uncertainty, it is a possibility that DDC will need to significantly dilute existing shareholders in the near future to become successful in the long run.

For further details see: