EVEX - Eve Urban Air Mobility: The Price Of Disruptive Technology

Summary

• Eve is positioned well with some unique advantages over competitors.
• UAM is a promising disruptive technology but big hurdles that have yet to be taken remain.
• Key risks include delays in development and certification, operational constraints and liquidity matters that could dilute shareholders.

Earlier this year, I covered Eve (EVEX) for the first time. At the time, company had announced a tentative agreement with BAE Systems for the purchase of 150 eVTOLs to be applied in a defense setting. Since then, we saw share prices decline by over 20%. In this report, I will have a look at the third quarter results.

The Risks Of Urban Air Mobility

One risk, I am seeing with coverage of Urban Air Mobility or eVTOL names is that the disruptive technology is often equated to value creation while this is not 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 way, urban air mobility at the current stage is not much different from biotech. There is a disruptive technology, which needs to be tested thoroughly and UAM (Urban Air Mobility) 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 Urban Air Mobility has several advantages that give it an edge. The big and most obvious one is its ties with Embraer (ERJ) giving them access to Embraer engineers and 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.

The pipeline for Eve is huge with an $8.3 billion backlog with partnerships for eVTOL orders as well as traffic management solutions. We see for instance United Airlines (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.

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 cash but did secure two credit lines of $92.5 million, giving the company a liquidity in excess of $400 million. In the third quarter, Eve burned $17.4 million from operations and additions to plant, property and equipment but this was significantly offset by the $15 million equity investment from United Airlines.

Net cash usage average approximately $13 million per quarter meaning that the company has cash on hand to fund its needs for over 6 years on the current cash usage levels. However, as development progress, the company will burn $100 to $150 million next year which means that in 2-3 years, the company is out of cash but another year of funding is secured via the $92.5 million credit line so we would end up with 3 to 4 years of liquidity.

The company needs three years to certify its eVTOL which means that currently there is no liquidity issue, but in case of delays that could become the case in which case Eve needs to access the debt markets if possible or dilute shareholders.

Conclusion: Eve Like any AUM company is High-risk and High-reward

Investment in AUM 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 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 years at least.

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.

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