JOBY - Joby Aviation: A High-Flyer Banking On A Nascent Industry

2023-06-30 07:46:43 ET

Summary

• Joby Aviation is focused on building an aerial rideshare service using its own electric, vertical takeoff and landing (eVTOL) aircraft.
• The company has strategic partnerships with Uber, Delta Air Lines, and Toyota, and recently received a $100 million investment from South Korea's largest telecommunications company, SK Telecom.
• Despite its potential, Joby Aviation is currently facing financial challenges, with increasing net losses and negative cash flow. However, the company has a large cash position and no debt.

One of the more interesting companies that I have come across recently is Joby Aviation (JOBY). With the enterprise focused on building and running a network of unique aircraft aimed at providing what can only be described as an aircraft based taxi service, the firm definitely is different than most companies in the aviation market today. Although many have never heard of the enterprise before, it boasts a market capitalization of $6.3 billion. This is shocking when you consider that the company is still pre-revenue. Having said that, progress achieved by management has been impressive and the opportunity for shareholders should be significant. Add on top of this the support that the firm has received from other companies out there today, and there is reason to be cautiously optimistic about what the future might look like.

A niche enterprise

At its core, Joby Aviation describes itself as an aerial rideshare enterprise. For years now, the firm has been building its own aircraft that is designed to safely travel into dense urban areas with as many as four passengers and a pilot. The aircraft in question has been described as an 'electric, vertical takeoff and landing' or eVTOL aircraft that doesn't require the kind of space and infrastructure that traditional aircraft require in order to take off and land. The first version of this, a miniature demonstration of the technology, was constructed back in 2015. Today, the company is in the process of producing a life-sized prototype and it has been working with regulators, namely the FAA, to receive the appropriate certifications to provide the services that is aiming to provide. In the image below, you can see the five different stages that the company needs to go through, as well as how far it leaves itself to be through each stage.

In a presentation released on June 28th, the management team at Joby Aviation announced the production launch of its prototype aircraft. For many Americans who don't live in or near major, densely populated cities, the concept of an aerial rideshare enterprise might seem ridiculous. But when you look at the data for the most densely packed parts of the country, it becomes clear that there is some market opportunity here. According to management, for instance, there are an estimated 29 million trips per day made within New York City. 99.4% of these are less than 50 miles in distance. In Los Angeles County, the number is even greater at 31 million, with 99.1% less than 50 miles in distance.

Given these massive numbers, it should come as no surprise that there would be a certain appeal to alternative means of transportation. According to one study from 2019, drivers in New York City spend an average of 92 hours in traffic every year. That's almost four days. The sad thing is that this is not even the worst city in the country. It's actually number four on the list. Los Angeles is the worst at 119 hours, or nearly five days. San Francisco comes in at 103 hours, while Washington, DC, comes in at 102 hours. For those living in Los Angeles, living and commuting in the city over a span of 30 years would translate to almost five months of one's life stuck in traffic.

The objective of Joby Aviation is to address this problem by making it easier to get from point A to point B. The end product would allow a traveler, for instance, who is stationed at JFK airport in New York to request a trip on their mobile app, catch a ride to the local skyport, fly to the airport from that point, and easily go about the rest of their trip. Management has identified a number of cities that it wants to target, including not only Manhattan, but also Philadelphia, Atlantic City, East Hampton, New Haven, and Trenton. Almost certainly, opportunities exist near or in any major city. The beautiful thing about the aircraft they are designing is that they can travel distances of up to 100 miles at speeds of 200 mph. They are also designed to be quiet. The company estimates that the aircraft, while in motion, will be around 45 decibels. For context , a moderate rainfall or the sound of a running refrigerator is estimated to be about 50 decibels, while a light rain comes in at 40 decibels.

The flights in question that the company will offer will range in distance from 5 miles all the way up to 150 miles. And even though the company is not operational from a revenue perspective, it has completed more than 1,000 test flights already with its prototype aircraft. In 2022, the company completed construction of its pilot production lines in California and it began production of its prototype aircraft. Along the way, the firm has struck up some rather interesting partnerships. One of the most notable involves ridesharing giant Uber Technologies (UBER). In addition to having a collaboration agreement with the company, it also acquired from Uber its Elevate business, the company's air taxi service, back in 2020. The purchase price for that enterprise was only $34.2 million. Joby Aviation also received a $75 million investment from Uber, plus they continue to work together from a technology collaboration perspective.

Delta Air Lines (DAL) made an investment in Joby Aviation back in 2022. In exchange for $60 million, Delta acquired 11 million shares of the company's stock. They also received warrants to purchase up to another 12.8 million shares at a price of $140 million. Of course, this is peanuts compared to the relationship that the company has with Toyota Motor Corporation (TM). Since beginning its relationship with Joby Aviation, Toyota has invested almost $400 million into the company. It also works with Joby Aviation on certain projects like factory planning and layout, manufacturing process development, design work, and more. The most recent development on the partnership side came on June 29th when Joby Aviation announced a $100 million investment that it received from SK Telecom (SKM), South Korea's largest telecommunications company, as part of an expanded partnership between the two firms.

Financially speaking, Joby Aviation does have some issues. As I mentioned already, the company has yet to generate any revenue. From 2020 through 2022, it saw its net losses expand from $114.2 million to $258 million. Operating cash flow went from negative $105.9 million to negative $235.9 million. Even if we adjust for changes in working capital, the metric would have worsened from negative $111.1 million to negative $287.7 million. Over the same window of time, EBITDA for the business went from negative $124.8 million to negative $368.2 million. As you can see in the chart below, results continued to worsen in the first quarter of 2023 compared to the first quarter of 2022.

The good news is that, even without factoring in the recent $100 million investment that the company received, it boasted $980.8 million in cash and cash equivalents at the end of the most recent quarter. The company also has nothing in the way of debt. This does grant the enterprise a great deal of flexibility as it continues to move toward market launch. Obviously, there is significant interest in this space as I demonstrated by listing off some of its partners. And there is a good reason for this. The total addressable market for the urban air mobility sector is estimated to grow to around $1 trillion globally by 2040. And as adoption becomes more widespread, the market could explode to $9 trillion only 10 years later. The hope for management and investors alike is for the company to be able to leverage its connections and progress so far to build out its own skyports in hot areas while also utilizing the more than 5,000 airport infrastructure facilities that already exist in the US today. Clearly, there is an opportunity for it to go global as well. But that will take time.

Takeaway

Typically, I am very cautious about companies that do not yet generate revenue and that generate significant and growing net losses and cash outflows. Projections are great to see, but they are not a guarantee of what the future might look like. Having said that, I do believe that the company is onto something, and it does have plenty of fuel, figuratively speaking, to continue pushing toward its goal. The company is undoubtedly a speculative prospect at this time. And investors would be foolish to forget that. But for those who don't mind the speculation and who are okay dealing with significant amounts of volatility until the company can start monetizing its technologies, I can understand why a bullish outlook might be adopted. As for me, because of my value investment philosophy, I can't rate the business any better than a 'hold'. But I do understand those who might elect to throw caution to the wind and buy in at this time.

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