UAL - Eve Holding Stock: A High-Risk High Reward eVTOL Future Bet

2023-05-09 20:41:34 ET

Summary

• Eve Holding, Inc. remains aligned for test campaign to start in 2024.
• Timeline and liquidity risk continue to exist as cash burn profile and timeline sensitivity of test campaign are not shared.
• Eve has several big advantages that it can capitalize on in the production phase, if it gets there.

Last year I started covering Eve Holding, Inc. ( EVEX ) and I am charmed by their approach towards creating a future for eVTOLs (electric vertical takeoff and landing) and urban air mobility ("UAM") with significant knowledge leverage that should help the company to create a successful product. In this report, I will have a look at the first quarter results and also highlight the risks of disruptive technology.

The Risks Of Urban Air Mobility

One risk I am seeing with coverage of UAM or eVTOL names is that the disruptive technology is often equated to value creation, while this is not necessarily the case.

In one of my previous reports , one of the article bullet points was the following:

The eVTOL development is in its early phase and it is likely that many of the eVTOL designs won't enter the market or create sustained success.

That remark will apply for the foreseeable future. In some ways, urban air mobility at the current stage is not much different from biotech or disruptive technology applied in commercializing space. There is a disruptive technology, which needs to be tested thoroughly, and UAM solution providers need to develop their product, test, and then scale up production. With the many UAM players active, there is no doubt that some will not be able to deliver on their prospects and might run out of liquidity runway even before their product is launched.

The risk I associate with Eve specifically is that whereas others already have a prototype, Eve does not and still expects to initiate the flight test campaign in 2024. While they don’t have an official certification target in their slide, comments from a previous earnings call indicate 2025 and as I explained when covering Vertical Aerospace, a one-year certification path from the moment flight testing starts might be optimistic. Just one year of additional flight testing adds cash burn and delays pre-delivery payments.

Eve Has Huge Advantages

Eve has several advantages that give it an edge. The biggest and most obvious one is its ties with Embraer S.A. ( ERJ ) giving them access to Embraer engineers. Over time, when a production phase is reached, Eve is likely to co-locate with Embraer relying on their production experience. So, Embraer is a strong partner in this, and I would say the strongest partner that any urban air mobility company has at this point. While the R&D phase is cash-intensive, the initial production phase is most often loss-making, but with the existing experience and footprint of Embraer, Eve can somewhat de-risk the production phase.

One thing that I do need to point out with regard to the backlog is that most of the backlog is unfunded and there is no clarity on when and in what amounts we will see pre-delivery payments pick up. There could be some in 2024 and a significant step up in 2025 and 2026 but the reality is that we are not given much insights, which also means that an $8.3 billion backlog is nice but if you have no funds flowing through from that while you are burning cash it is nice to have and you just hope you get to the production/delivery moment before the bank accounts are empty.

The pipeline for Eve remains huge, with an $8.3 billion backlog with partnerships for eVTOL orders as well as traffic management solutions. We see, for instance, United Airlines Holdings, Inc. ( UAL ) as a customer for 400 eVTOLs, giving Eve a big airline customer. The UAM solutions will open up new opportunities with fully closed end-to-end solutions that will also appeal to airlines, so having airline customers is big and it is important. Airlines currently rule the skies, and it is expected that they will be important to the backlog of UAM companies going forward as they develop new products and services, of which eVTOLs are part.

What we also see is interest from the defense industry and partnerships on technology and logistics. So, Eve is aligning product development with markets, logistics, infrastructure and technology in a way we don’t see with many other players. With its UAM traffic management system, the company is working towards a full solution suite.

As I mentioned before, if you are looking for profits or positive cash flow UAM companies are not your cup of tea. These companies are in the stage of bleeding cash and are fully focused on pacing development with the available liquidity. Eve has no revenue but did secure a standby facility of $96.8 million, giving the company a liquidity in of $319.4 million after a $19.9 million cash burn in Q1 2023. In 2022, the cash burn per quarter was $15 million. In 2023, there will be a step up to between $130 million and $150 million. Which indicates that the company would end 2023 with around $260 million to $280 million. Eve displays its liquidity as strong, so it might have made some assumptions on cash burn and certification but it is not sharing those which is somewhat disappointing because if we just model $100 million in cash burn per year for 2024 and 2025 then we Eve is left with $60 to $80 million. We are not given any indication on the cash burn profile, but I do see timeline risks even though the company says it is de-risked pretty much through 2025.

The obvious risk is if the certification slides or cash burn grows beyond what is currently projected, Eve will require additional funding which could hurt shareholders.

Expectations are that Eve will generate revenues from their UAM traffic management software, of which a new iteration will go on trial in the second half of this year. While not a major revenue stream, it is something that could eventually be extremely high margin for the company and help the company preserve a tiny bit of its cash pile.

Is Eve A Good Stock To Buy?

Since I marked EVEX stock a buy, two things have happened. The stock in accordance with my buy rating climbed 30%, but at the same time Wall Street analysts lowered the price target from $9.63 to $8.38 meaning that there is less upside due to a rising share price and a lower price target. At the same time, companies like Eve are hit-or-miss investments where you actually bet on a company getting to a commercial point for its product before it runs out of cash. I see potential in Eve, but I wouldn’t want to pretend that I know what the price target is going to be and realistically Wall Street analysts likely have no clue on what the profit and cash burn profile will look like going forward.

Whether EVEX is a stock to buy depends on your risk appetite. If you expect value creation anytime soon without any risks, then this is not your cup of tea. If you believe in the technology and the timeline that Eve has stipulated, then it might be worth taking a speculative buy position.

Conclusion: Eve Stock, Like Any UAM Or eVTOL Company, Is High-Risk And High-Reward

Investment in UAM companies is for those with patience and who believe in the disruptive opportunities paying off over the long term. For now, I believe that Eve Holding, Inc. is positioned very well with a diversified application base for its eVTOL product, while it has solid backing from Embraer and with the possibility of some UAM traffic management software revenues most likely in 2024, the company can get some cash without diluting shareholders. Eve points at a current strong liquidity position, but I am not fully convinced of that.

However, the risk of delays in development of certifications should be kept in mind next to any constraints that might exist in the operational field of traffic management and infrastructure as well as the manufacturing infrastructure. We are getting a bit more insight in the timeline now, and what I am seeing is quite charming, but I am not convinced the company has enough funds. So, there is some risk of dilution, but with backing from Embraer I do believe that any capital infusion can happen at relatively favorable terms. With that in mind, I mark Eve Holding, Inc. shares a speculative buy, with the note that investors should be extremely well aware of the risks of timelines sliding and of excessive cash burn.

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