Joby Aviation: A Risky But Potentially Rewarding Investment

Why you should consider buying it

Since I last wrote about Joby Aviation (NYSE:JOBY) on January 21, 2022, it is much closer to its goal of beginning commercial passenger operations with air taxis. The company easily survived the high inflation, rising interest rate, and slowing economy in 2022 despite being a pre-revenue, cash-burning company. The stock is up 83% year-to-date in 2023 and up around 40.27% from the date I authored the 2022 article. The S&P 500's price declined 1.89% over the same period.

In that article, I recommended a buy for long-term aggressive growth investors, and I maintain that point of view. The company is a first mover in pushing its electric vertical take-off and landing aircraft (eVTOL) design toward regulatory approval in the U.S. market. It also has shown visible progress toward commercializing the business. Joby has recently delivered its first eVTOL to the U.S. Air Force six months ahead of schedule in preparation for initial service operations with the Department of Defense in 2024. Additionally, management has positioned the company to begin commercial activities in the U.S. in 2025. Suppose you have room in the speculative portion of your portfolio; I recommend buying the stock today to capture the potential upside from the company commercializing the air taxi business over the next several years.

The market is potentially enormous

According to the company's S-1, Joby began researching and developing eVTOLs in 2009 to fly these nearly silent aircraft short distances in urban areas as an air taxi. Management believes eVTOLs value proposition is that it helps travelers save time and reduce traffic congestion in urban areas. This idea is not unique. According to this report, "Many metropolitan regions are investigating Urban Air Mobility ("UAM") [air taxis] as a new transport mode for medium distance intra-regional trips."

The United Nations predicted that 68% of the world's population will live in urban areas by 2050, rising from 55% in 2018. Rapid urbanization has started to overwhelm the ground transportation networks in large cities worldwide, sparking demand for air taxis globally. In 2021, Morgan Stanley projected that today's nascent UAM market would grow to $1 trillion by 2040 and $9 trillion by 2050. The potential upside for a company that can become a leader in such a massive market is one of the reasons that the unprofitable Joby Aviation didn't implode in a difficult market for early-stage companies in 2022.

Although competing companies are in the UAM market worldwide, Joby is one of the furthest ahead in commercializing an air taxi network in the U.S. marketplace. The company also has significant financial backing and partnerships, including the U.S. Department of Defense. On September 18, 2023, management announced it was building its first manufacturing facility in Dayton, Ohio, capable of producing 500 eVTOLs annually. It expects the plant to come online in 2025. If the company remains on its timeline, it could start generating its first revenue in 2025. An investment in this company is speculation on Joby becoming a leader in a potentially massive market.

An excellent cash cushion for a pre-revenue company

Consensus analyst revenue estimates for Joby's projected first year of commercial operations in 2025 is $84 million. However, the revenue estimates listed below presuppose that the company can gain Federal Aviation Administration ("FAA") certification in the predicted time frame and that the expected demand level for air taxis can support the pricing assumptions for the service -- no sure things. Suppose things go wrong; the company had better have a strong balance sheet to survive any delays in ramping up revenue.

At the end of the second quarter of 2023, it had $1.19 billion in cash and short-term investments with zero long-term debt. The company has a cash burn rate of $321.72 million. At the current cash burn rate, Joby would run out of money in 3.69 years or around the beginning of 2027.

The unwelcome news is that the closer the company gets to commercialization, the likelier the cash burn rate will increase as more investments in areas like manufacturing become necessary. An increasing burn rate would shorten the time Joby would need to raise additional funds or find itself in financial distress. The good news is that Joby has many partners that want to see it succeed and will invest more money to keep the company afloat until it can bring in revenue and hopefully produce positive free cash flow. For example, Korean company SK Telecom made an equity investment of $100 million in Joby during the first quarter, and famed investor Baillie Gifford led an investment of $180 million. The image below shows a few of Joby's more prominent partners, many of whom hold an equity stake in the company.

Presently, Joby is not in financial distress, and the above partners continue to invest in it, displaying confidence that the company's plans are feasible.

The company has made tremendous progress

Things have rapidly progressed since Joby began flying full-scale prototypes in 2017 and 2020, becoming the first eVTOL manufacturer to obtain a G-1, the first stage of the FAA approval process for new aircraft designs. The company is now close to completing stage three, which is paperwork specifying the tests and reports that the FAA agrees it needs to perform to demonstrate compliance with safety regulations that apply to the aircraft.

Joby is also starting stage four, a performance assessment where the aircraft must demonstrate operational readiness and safety according to the tests laid out in stage three. Each quarter, the company updates its progress through the various stages. Provided it completes all five stages, the company is gearing up for a 2025 launch of commercial services.

Plenty of bearish sentiment toward the stock

Although Joby has made steady progress toward becoming the first to develop a commercial flying taxi service in the U.S., sentiment shifted to negative after JPMorgan downgraded the stock on July 19. In addition to the stock price cratering since peaking in early July, the stock has attracted the interest of short sellers. The percentage of float short has spiked higher since July, indicating heavy bearish sentiment in the company.

On October 10, Kerrisdale Capital issued a short report arguing against the viability of battery-powered flight operations. According to the Kerrisdale report:

Joby is guiding to type certification by 2025, boasting of having completed 3 of the 5 certification stages. But those were mostly comprised of paperwork. Little real-life testing, analysis, and verification (Stages 4 and 5) have been achieved for the purpose of certification, and those make up the lion's share of time, cost and effort expended in the certification process. It’s clear that it's still early days in that respect, particularly given that major safety concerns – such as battery fires and rotor-related accident scenarios – have yet to be appropriately addressed. The logistical hurdles of pilot training and air traffic control also remain, both of which may take years to clear given recent FAA proclamations.

Source: Kerrisdale Capital

In response to those allegations, according to a Seeking Alpha news report, Joby management said, "These statements were published by a company that has a vested interest in lowering the share price of Joby." While I don't ignore short-seller concerns because sometimes, in hindsight, they are correct, I disagree with Kerrisdale's assessment. For instance, I believe Joby has a strong safety culture, has likely worked on ways to prevent battery fires, and has addressed rotor safety since it first started test-flying eVTOLs. I have my doubts that those things "have yet to be addressed." Additionally, Joby has thought ahead about things like pilot training, and the FAA has a plan for air traffic control and more.

It has many competitors

The enormous market size has attracted many competitors, with the most prominent companies being Archer Aviation (ACHR), Lilium (LILM), Volocopter, Airbus (OTCPK:EADSY), Hyundai (OTCPK:HYMTF), Embraer-backed (ERJ) Eve Air Mobility (EVEX) and Vertical Aerospace (EVTL). However, it is ahead of most competitors in gaining regulatory approval. The only competitor that is even with Joby is Archer Aviation in the U.S.

This article cites a Canaccord Genuity analyst saying, "In our view, [Joby] and [Archer Aviation] are the closest to having their respective aircraft types certified by regulators, with years of flight tests under their belts and final approvals expected in 2024 [Archer Aviation] and 2025 [Joby]." Joby and Archer are Canaccord's chosen winners at this early industry stage.

While Joby established a deal with Delta (DAL) in 2022 to provide eVTOL air services to Delta customers, Archer announced a 2022 deal to sell 100 eVTOLs to United (UAL), which plans to launch air taxis between Chicago's O'Hare International Airport and Vertiport Chicago, North America's largest vertical aircraft take-off and landing facility. Additionally, Joby isn't the only eVTOL company that has a deal with the Air Force. Archer announced an agreement in July 2023, where the Air Force will purchase up to six of Archer's eVTOLs for up to $142 million.

The most significant difference between Joby and Archer is that Archer is just an eVTOL manufacturer. In comparison, Joby is a vertically integrated company that manufactures eVTOLs exclusively for its air taxi service. There are advantages and disadvantages to both business models. A potential advantage of Joby's business model is that a vertically integrated model could spread the costs of developing and operating aircraft across many paying customers; it could create economies of scale, potentially leading to lower fares for customers and higher profits for the company. Additionally, a vertically integrated taxi service has the potential to create subscription services for frequent flyers, thereby generating recurring revenue. The burden of this business model is that the company must invest significant funds in developing landing spots, certifying pilots, and the operating costs of the eVTOLs.

The advantage of Archer's business model is that it can avoid all the complications of setting up landing sites and training pilots. It can concentrate solely on building aircraft. The disadvantage is that selling eVTOLS is a one-time sales model with little recurring revenue. Regardless, both companies are first movers in the industry and could establish significant market share in the U.S. before others can get their aircraft approved.

The following chart compares several eVTOL competitor companies' progress toward receiving FAA certification.

Some of the above are foreign companies seeking approval from authorities other than the U.S. FAA. The furthest ahead might be Volocopter, which is on the path to achieving certification by the European Union Aviation Safety Agency (EASA) in 2024 and becoming the first eVTOL to operate a commercial air taxi service in the world, with a debut at the Paris Olympics.

Vertical Aerospace has yet to apply for certification in the U.S. but has already done so in Europe. However, Vertical Aerospace is significantly behind in its progress toward certification compared to many of its competitors. In May of this year, the company pushed back its timeline for regulatory approval until the end of 2026. Furthermore, the company recently had a significant crash in August. While the accident should not delay the certification process, it is not a good look.

Eve Air Mobility is a Brazilian company seeking dual certification with Brazilian regulators and the U.S. FAA by 2026. In reality, whether Eve can achieve certification in the U.S. or Brazil by that date can be disputed. For instance, the company reported in May that it had only just completed a wind tunnel test, so there is a big question mark of whether Eve has a working prototype yet. As for Airbus and Hyundai, I have yet to find news that either company has begun the certification process with any regulator globally. So, although Joby has many competitors, there is little question that it is one of two leaders in the U.S. market. Additionally, with the help of partners Toyota (TM) and ANA (All Nippon Airways) (OTCPK:ALNPY) in Japan and SK Telecom (SKM) in Korea, it could quickly become a leader in those respective Asian countries.

Valuation

Although Wall Street analysts have revenue and earnings estimates for Joby out to 2032, and there are ways to value pre-revenue companies, investors should take all these assessments and attempts to value the company with a massive grain of salt. How much revenue the company will produce several years from now depends on when the company can achieve FAA approval, how much demand the public shows for air taxi services in reality, and the price the public will pay for such services -- all unknowable things at this point. Today, an investment in Joby is pure speculation and sentiment based. So, anyone who invests in this stock should expect it to be volatile.

Since the company lacks revenue and profits, the simplest method that you can use to check the stock's valuation quickly is checking the price-to-book (P/B) ratio. The chart below shows Joby's P/B ratio compared to its U.S. peer, Archer Aviation.

Joby's valuation has pulled back substantially since the beginning of July. Since nothing has materially changed in the company's prospects for getting its air service off the ground, now may be an excellent time to buy the stock on the dip.

Should you buy it?

Joby has a potentially very high return if the company achieves FAA approval for its eVTOL within the next two or three years and can commercialize its air taxi service. However, those are big "ifs." There is no guarantee that Joby can accomplish any of its goals. This stock is very speculative. I recommend buying this stock only for investors willing to speculate. Risk-averse investors should avoid.