EVEX - Joby Aviation: Turbulence Ahead

2023-08-01 09:28:19 ET

Summary

• Joby's stock surge of 140% YTD, driven primarily by short covering and retail flows, lacks grounding in improved business fundamentals.
• The FAA's 2028 (vs. 2025 expectations) target for meaningful operations points to a prolonged pre-revenue phase for Joby, likely straining the company's financials.
• While the potential market size for eVTOL services is vast, the FAA’s "crawl, walk, run" approach impacts short-mid term market opportunities.
• Joby's current market cap is more than three times that of Archer's and is ~15% of the ~$35B helicopter market, while my DCF analysis indicates it's trading above its intrinsic value, signaling an overvaluation.

Joby Aviation ( JOBY ) – a name that’s been making waves in the eVTOL industry, a sector that’s currently a high-stakes playground. With a thrilling blend of promise and possibilities, the buzz around this industry fascinates me. Today, however, I’m here to throw a curveball and lay out my research-backed stance on why I’m giving Joy a firm “sell” rating.

This isn't my maiden voyage in the eVTOL cosmos here on Seeking Alpha. Back in March, I set my compass towards 'buy' on Eve Holding ( EVEX ), largely due to what I perceive as a competitive edge and an approach that stands out from the crowd, Joby Aviation, Archer Aviation ( ACHR ), and Lilium ( LILM ) included. My stance on Eve remains rock-solid.

Now, don't get me wrong. I'm not sounding the alarm on Joby because I'm dismissive of their vision or unimpressed by the strides they've made in eVTOL tech. Quite the opposite. My 'sell' position on Joby arises from a combination of factors that, to my mind, cast a sizeable shadow over its soaring stock price:

1. The steep ascent in Joby's stock price, spurred largely by short covering and retail flows, seems to be outpacing any fundamental business improvement
2. The FAA's target of 2028 for eVTOL operations to really take off suggests a lengthy spell of zero revenue for Joby, enough to make even the healthiest of balance sheets break into a cold sweat
3. The still-in-the-works rulemaking for brand-new tech like electric engines and batteries teeters on the edge of considerable risks and could be a stick in the FAA certification wheel
4. The FAA’s “crawl, walk, run” approach to market development suggests the eVTOL services market might end up being a 'slow and steady' rather than a 'rapid ramp-up' story
5. As Joby blazes the trail, Archer and Lilium are hot on their heels, presenting a clear and present danger to Joby's leadership position and casting a cloud over its market share and revenue prospects

And so, with these key points in mind, I initiate my coverage on Joby with a Dec-23 Price Target of $7 a share and a “sell” recommendation.

Quick Overview of the eVTOL Industry

Electric vertical take-off and landing (eVTOL) aircraft are shaping the future of transportation. The idea of air taxis whizzing through city skylines, revolutionizing commuting, and mitigating ground traffic congestion sounds radical. The market for eVTOLs is expected to see crazy growth , reaching ~$52 billion by 2031, growing at a 23.6% CAGR. The hype has led to several companies throwing their hats in the ring, with Joby Aviation, Archer, and Lilium being prominent players. To get a visual look and hear from CEOs in this industry, this video does a great job.

The Current Scenario

Lately, the eVTOL companies, particularly Joby and Archer, have seen their stock outperform the broader market significantly, up 140% and 150% YTD, respectively, versus the S&P 500’s ~20%. A risk-on environment fostered by retail investors and short covering seems to drive this performance, with the stocks arguably decoupling from fundamentals. However, I sense a healthy dose of skepticism among institutional investors concerning the timing and scale of commercial opportunities for eVTOL. This can be seen through the ongoing increase in short interests for Joby in the past few months despite the share price increasing:

Joby Aviation Introduction

Joby Aviation has become somewhat of a market darling in the eVTOL space. Since its inception in 2009, Joby has made strides in developing its eVTOL aircraft, intending to commercialize aerial ridesharing. The concept is audacious and revolutionary, for sure. With its formidable mgmt. team and progress on its certification timeline; Joby is currently leading the eVTOL race in the US. The firm has made remarkable progress, recently receiving its Special Airworthiness Certificate from the FAA for its aircraft. Joby’s recent updates around range, payload, and battery technology have been encouraging, and the firm’s balance sheet is solid. The mgmt. team has proven adept at executing its plans, which have helped the firm earn its market-leading position.

Joby Aviation - Investment Case

High-Flying Valuation vs. Grounded Fundamentals

Joby's stock performance in recent times has been nothing short of remarkable, with a surge of over 140% YTD. While I admit such a rally is exciting to watch, I question whether it's founded on robust financial fundamentals. To me, this rally, particularly the 60% increase at the end of June, feels more like a hot air balloon propelled by short covering and retail flows rather than grounded on a bedrock of improved fundamentals.

Exuberant Expectations – Reality Check Required

Investor sentiment towards Joby currently reminds me of a child on Christmas Eve, overly excited and eagerly anticipating the arrival of Santa Claus. The truth, however, might be a little less magical. The eVTOL industry, in its infancy, faces a multitude of challenges, ranging from battery technology and powertrain innovation to cost structure, pilot training, and infrastructure development.

The FAA’s recently released Advanced Air Mobility ((AAM)) Implementation Plan is akin to a sobering splash of cold water. It outlines a measured "crawl, walk, run" approach, setting 2028 as a more pragmatic target year for meaningful operations. While some optimists may clutch onto the mention of 2025 for potential operations, I argue that full-scale commercial eVTOL usage is likely a story for the later part of the decade.

Financial Strain from Prolonged Commercialization Timeline

Given the extended timeline until commercialization, Joby's financial picture could come under significant pressure. Picture this: years of cash burn with no significant revenue stream. In my opinion, this scenario would strain Joby’s balance sheet and potentially weaken its stock performance, raising serious questions about its current valuation.

Uncharted Territory in FAA Certification

Investors should pay careful attention to the FAA certification process . It's akin to a complex dance routine where missteps can lead to dramatic falls. Joby has been making encouraging progress, but the finale is still a long way off. The FAA is yet to finalize rulemaking for groundbreaking systems like electric engines and batteries, creating an air of uncertainty.

A recent audit by the US Office of Inspector General identified a lack of consensus on airworthiness standards and operational regulations for powered-lift aircraft. This could prove to be a significant hurdle in reviewing new technologies and setting standards for future eVTOL aircraft.

Market Size: A Crowded Sky

Yes, the eVTOL market holds enormous potential, a tantalizing vista of immense opportunities. However, I believe investors might be overly ambitious about the time it will take for this market to mature. The FAA’s implementation plan suggests a more gradual ramp-up of commercial operations. It's a slow-burning fuse, not a firecracker. Consequently, the market size for eVTOL services may not expand as rapidly as some anticipate in the short to medium term.

Finally, we must not forget that the eVTOL space is not the exclusive playground of Joby. Archer is flying in close formation, and the lead Joby currently enjoys might soon be contested. In this dynamic landscape, there's no guarantee of maintaining a pole position.

In brief, while I wholeheartedly acknowledge Joby's vision and impressive strides in eVTOL technology, my analysis leads me to advise caution toward their stock. There's an old saying, "Fasten your seatbelts, it's going to be a bumpy ride." For now, I prefer to keep my seatbelt fastened and my portfolio grounded.

Valuation Methodology

As I mentioned earlier, the recent market reaction to Joby’s receipt of its Special Airworthiness Certificate resulted in a 60% stock rally. This strikes me as overblown. This rally is driven more by short covering and retail flows than improved fundamentals. The announcement is, after all, an implied part of the overall certification plan. I do, however, acknowledge that the certification path has been somewhat de-risked over the past month, with Joby having achieved its Means of Compliance and set to begin flight tests with its conforming aircraft.

Additionally, if the eVTOL market reaches $58B by 2035 as per the widely known KPMG’s forecasts , and if Joby can capture an ambitious 25% market share and 40% EBITDA margin, the resultant Dec-2023 price target becomes ~$9.5. However, the company still has a long way to go before these assumptions become reality.

Also, the current helicopter market, valued at ~$30B, and Joby’s non-revenue generating status underscore my belief that JOBY is overvalued. Joby’s current $5.5B market cap, coupled with the host of industry-wide risks looming ahead, further increases my confidence in my “sell” case.

While the eVTOL sector promises an exciting future, the path to fruition is riddled with uncertainties. Until I see further de-risking and evidence of sustainable progress, my cautious stance on JOBY persists. Thus, I prefer to value Joby with a discounted cash flow analysis as I believe this enraptures the full value of the business on a risk-adjusted methodology.

Discounted Cash Flows Analysis

In my following Discounted Cash Flows analysis, I use the consensus estimates from CapIQ, forecast from 2023-2032. I calculated a 12.6% WACC using a 4.15% risk-free rate, 10% expected market return, and Joby’s levered beta of 2.12. I use the WACC to discount the UFCF to present value. Finally, I calculated the UFCF by adding NOPAT + D&A, less Capex (I excluded the changes in NWC because Joby is relatively small still, and YoY changes are highly unpredictable).

I use the perpetuity growth methodology to calculate my Dec-23 price target for Joby Aviation. I assume a 2% terminal growth rate to arrive at a price target of $6.74, or a $4.5B market cap, as shown below.

If you believe a 2% terminal growth rate is conservative for Joby’s industry, a 4% terminal growth rate implies an $8.3 price tag (with the same WACC). Conversely, if you believe companies like Joby deserve a specific risk-adjusted premium to the discount rate, a 15% WACC would imply a $4.6 price tag. See below for the DCF sensitivity analysis:

Overall, I round up to $7 a share to reach my Dec-2023 price target for Joby Aviation.

Upside Risks to Rating

The ‘high risk, high reward’ paradigm is fitting for an early-stage, pre-revenue company like Joby, which is brimming with execution risks. However, the flip side to this coin includes several scenarios that would warrant a reconsideration of my ‘sell’ thesis:

Exceeding Targets and Milestones – Should Joby consistently exceed its targets and milestones, this would fast-track its journey to becoming a full-fledged eVTOL powerhouse

FAA Certification – If Joby were to secure FAA certification ahead of the projected timeline, this would undoubtedly inject investor confidence and provide a catalyst for stock appreciation

Industry Growth – The eVTOL industry’s growth could outpace estimates, potentially driven by factors such as cost savings, community acceptance, low-noise profile, and zero-emissions benefits. This would favorably impact Joby’s prospects and performance

Aircraft Utilization – Joby's 5-seater aircraft could achieve better utilization rates than we currently assume, giving the company a competitive edge against other eVTOL players focusing on 2-seater or 7+ seater configurations

Network Operations – There is a chance that Joby’s network operations could compete more effectively than anticipated with traditional modes of transportation, other Urban Air Mobility ((UAM)) competitors, and ride-sharing platforms

Recap and Final Thoughts

Joby Aviation reports Q2 2023 earnings on Wednesday, August 2 ^nd . I am excited about this call, among other firms in the industry reporting in early August, and hopefully, we get more confidence in the 2025 commercialization for Joby’s eVTOLs. However, as of now, while I appreciate the potential of the eVTOL market and the strides Joy Aviation has made, I believe the current valuations and expectations for Joby are inflated. Given the impending regulatory, technical, and market adoption challenges, along with fierce competition, I am issuing a “sell” recommendation for JOBY, with my intrinsic value price tag of ~$7 a share.

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