EVEX - Eve Holding Stock: Bet On eVTOL Future

2023-03-17 11:26:37 ET

Summary

• Eve Holding, Inc. cash burn to increase in 2023 as the company will develop its prototype.
• Timelines are currently well aligned, but delays could infuse risks.
• Eve Holding, Inc. stock is a very speculative buy for those believing in the timeline and product of the Urban Air Mobility eVTOL solutions provider.

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 full year 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 my previous report , 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.

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.

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.

Right now, 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 two credit lines of $92.5 million, giving the company a liquidity in excess of $400 million after a $20.8 million cash burn in Q4 2022 and a $60 million cash burn in 2022 averaging $15 million in cash usage per quarter in 2022.

In 2023, the cash burn will be between $130 million and $150 million. The company has $311 million in cash and equivalents plus $93 million in liquidity via credit lines giving the company liquidity for 2.7 to 3.2 years meaning that it is funded through 2025. Until then, there are important milestones. In H1 2023, the first suppliers should be selected and that gives a better cost figure on the eVTOL product. It is an extremely important point because it will allow for establishing the system architecture and prototyping this year and flight test campaigns in 2024. If the cash outflows are not bigger than currently anticipated, that flight test campaign including certification by 2025 should be pretty much de-risked.

Additionally, by establishing a supplier base and the determination of the system costs, that $8.3 billion backlog can start materializing as Eve can look at the backlog and start firming agreements including pre-delivery payments, which will help the cash flow by 2024-2025. So, right now things are almost seamlessly aligned for success. 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?

Whether Eve is a stock to buy depends on your risk appetite. If you expect value creation any time 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. Wall Street analysts have a $9.63 price target providing nearly 60% upside, though it is hard to really value the company, as it has no significant revenue stream yet and it burns cash for the years to come.

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 with liquidity sufficient to fund through the next 3.

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. 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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