2023-08-31 18:01:59 ET
Summary
- Joby Aviation's timeline for commercial launch has been delayed, potentially pushing it to 2025 or later.
- Cash burn and dilution may be greater than initially expected, raising concerns about the company's financial future.
- The current macroeconomic situation, including higher interest rates and an inverted yield curve, adds further risk to Joby's prospects.
Investment Thesis
Occasionally, when we look at the investment landscape, we look out for unique ideas that not only change the industry, but disrupt it completely. In the auto industry, for example, Tesla ( TSLA ) has completely changed the North American market with its price-competitive electric cars, taking other car manufacturers from market leader to catch-up.
Therefore, we revisit our thesis on the innovative company Joby Aviation (JOBY), which makes eVTOLs or electric vertical take-off and landing aircraft. The stock is up a staggering 39.47% since our "Buy" rating last year at $5.32, compared with just 8.67% for the S&P 500. However, given recent developments, we will review why we are changing this "Buy" rating to "Hold".
A Distorted Timeline
First, perhaps the biggest problem we have with Joby right now is the fact that we may have been too quick to judge its ability to predict the company's timeline and what the future will look like. Last year, when our previous article appeared, we thought Joby would go commercial sometime in late 2023, probably 2024.
More than a year later, however, the shortest timeline for a commercial launch stands somewhere around 2025, with the FAA having outlined steps with their plan called "Innovate28" for eVTOL operations at scale and in one or more locations by 2028. And while progress is being made and Joby is at the forefront of the eVTOL landscape, it could be at least a few more years before commercial operations take off.
Joby IR
This leads to our second point, namely that cash burn and dilution may be much greater than initially expected. In our previous report, for instance, we highlighted the fact that management expected to have enough cash in the fourth quarter of 2021 to support them until commercialization, which as of recent doesn't seem to be the case anymore.
Today, we're reporting that we ended 2021 with 1.3 billion in cash and short-term investments on our balance sheet, which is not only sector leading, but importantly, should be sufficient to support us through to commercialization. ( Q4 2021 Earnings Call )
Earlier this year, in May, Joby launched a $180M stock offering that diluted shareholders by about 43.98M shares. Looking further at the balance sheet , the company has net debt of -$1.17BN, meaning that cash and short-term investments far exceed total debt. Despite this, operating income was -$414.16M for the last 12 months, representing a significant cash burn that has been growing steadily. Even assuming management's estimated cash burn of $360M to $380M for this year, the company would only have just over three years left at its current cash burn rate.
TIKR
Not only could delaying operations further increase the risk of further dilution as cash burn continues, but the time value of money also works strongly against investors in general. As the date of potential earnings is pushed further into the future, the discount factor of future cash flows will also be much higher.
If we were to flip Joby's valuation, the company should currently bring in $286.11M in free cash flow, at the current valuation of $5.15BN and a very reasonable 18x P/FCF multiple. In terms of WACC, we believe a rate of 12%, implying a 10% return, is applicable, although in reality it is probably closer to 14%, given it's trading at a very high beta of 2.06 . To maintain its current value of $286.11M in free cash flow, the company would need to be able to rake in $793.40M at a discount rate of 12% in 10 years' time. Especially when you know that Joby is currently burning through $360M to $380M on an annual basis, getting positive free cash flow first will already be quite a challenge.
Calculator Soup
For reference, Uber ( UBER ) reported its largest free cash flow of $1.14 billion last quarter, with a free cash flow margin of 12.4%. By 2022, Uber was estimated to be delivering 7.6 billion rides , which raises the question of at what immense scale Joby would have to operate at all to achieve those levels of cash flow. From a top-down perspective, we can look at the current ride delivery market, which is currently worth about $69.3 billion and is expected to reach $205.83 billion by 2030, according to market research. Other market research also suggests that the eVTOL market will be worth $28.34 billion by 2030. This would account for 13.77% of the total ride-sharing market, which would already be a huge challenge knowing the FAA's timeline to market eVTOLs by 2028.
However, much of this market is in Latin America, Europe and China with other players such as EHang ( EH ), Lilium ( LILM ) and Embraer ( ERJ ). In North America, however, Joby is likely to face competition mainly from Arch er ( ACHR ) a s they have received the most funding and are arguably ahead of other smaller competitors when it comes to regulation. As the North American eVTOL market is expected to account for about half of the total global market, we expect the market to reach $14.17 billion.
Advanced Air Mobility Reality Index
For this example, let's say Joby becomes the market leader, along with Archer, and together they have a 60% market share. That would bring Joby's revenue for 2030 to $4.25BN, which is also in line with Seeking Alpha's revenue estimates . We think this figure is still quite optimistic, as it would come close to Uber's 2016 revenues of $3.85bn. For an airline's perspective, Southwest Airlines achieved $21.59BN in revenue in 2022, indicating the scale at which Joby should already be operating.
When we talk about the Free Cash Flow margins Joby should be looking at, we can look at the margins of ride hailing operators, aircraft manufacturers and airlines alike. Most of these companies operate on a margin of less than 10%, although we can give Joby the benefit of the doubt and hold a 15% FCF margin, as they control almost every aspect from manufacturing to operation and integration into ride-hailing services.
TIKR
Using a fairly optimistic free cash flow margin of 15%, we would be left with free cash flow of $637.5 million. If we discount this figure at a WACC of 12% in 2030, we have a present value of free cash flow in the year 2030 of $288.37 million. This means that even if we were to put an optimistic growth rate of 4% on the shares, the present value is only somewhere around $3.60 billion.
Per share, this works out to $5.19, which is much closer to the price of $5.32 at which we gave our previous buy rating. This calculation also implies that Joby has enough capital to become cash-flow positive, and most importantly, the fact that they can get FAA approval to start commercial operations in the next few years, so that they are already at scale by 2030, which is a pretty big risk if you ask us.
A Risk-Off Setting
Another important reason why we would be very wary of Joby has to do with the current macroeconomic situation, which is vastly different from that of last May 2022. Short-term interest rates have risen to almost 5.50%, the 10-year rate is currently above 4.10% and the yield curve is deeply inverted.
Not only do these higher interest rates reflect higher funding costs if Joby were to take on debt to fund their path to commercialization, but an inverted yield curve also prompts us to exclude more risk, as a recession is also likely to be imminent, which probably does not bode well for riskier stocks compared to those already supported by strong free cash flows. Right now may not be the time to own speculative stocks. Moreover, looking at insider trading , where the CEO/ Chief Architect and others sell shares directly on the open market at current price levels, does not inspire too much confidence either.
OpenInsider
The Bottom Line
After reviewing Joby's operations and taking into account further delays on the way to commercialization, we argue that Joby's intrinsic value is likely to be closer to $5.19 per share, reflecting a higher discount factor as free cash flows are shifted into the future. The influx of insider sales, along with our risk-averse sentiment of the current market, also make us reluctant to find value in the stock and downgrade it to "Hold" for now.
The current market also remains very uncharted territory, with almost everything depending on the FAA's approval of eVTOLs, and it remains to be seen at what margins Joby will be able to operate, if at all , in the future. It also remains to be seen whether Joby will be able to achieve commercialization with its current burn rate, or whether the company would have to raise additional capital at the expense of shareholders that would be diluted. Seeking Alpha's Quant Rating also currently has Joby as a "Hold", with valuation and profitability being a downgrade, while still giving it an A+ for momentum.
Seeking Alpha
For further details see:
Joby Aviation: A Clouded Path To Commercialization