Going public and delivering on promises with Deutsche Bank’s eVTOL analyst

And why Archer is DB's favorite AAM stock

☁️ Hi Everyone, Robert here. A big welcome to the 75 new subscribers that have joined us since last week! I’ve enjoyed hearing your thoughts via email and social media. If you enjoy Airframe, please share!

☁️ I’m really excited about Strativ Group’s participation in today’s newsletter. In the past few years, the team at Strativ has recruited more than 1,000 individuals globally into the eVTOL & AAM space. Scroll to the end to see some roles they’re currently looking to fill. Let’s help someone find their dream job!

☁️ Final note: on Thursday I’m launching The Deep End, a weekly roundup of the most interesting things happening in hard tech. Hard tech startups (also known as deep tech startups) are the companies that are tackling difficult, expensive problems in areas like robotics, aerospace, and clean energy—the stuff that has an enormous impact on society and really fires me up. See you on Thursday!

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Archer’s Midnight eVTOL

SPAC fever hit an all-time high in 2021: a whopping 59% of all initial public offerings in the U.S. came to us in the form of a SPAC.

During that period of hype, five major eVTOL players—Joby, Archer, Lilium, Vertical, and Eve—merged with blank check companies (i.e., SPACs) to raise enormous amounts of capital.

One key difference between a SPAC and a traditional IPO is that SPACs allow companies to use future projections to receive credit for what they plan to accomplish over the next couple of years, unlike a traditional IPO process. With the help of Deutsche Bank’s Edison Yu, a mobility analyst who frequents CNBC to share his point of view, today’s newsletter looks at how these companies have performed since their stock market debut.

Pursuing a SPAC once signaled innovation and daring. In hindsight, we see hubris and folly. SPACs dropped from 613 in 2021 to just 86 the following year. But like many things in these interesting times, it was hard to know whether the SPAC was going to be a permanent fixture or just another quirk of the pandemic.

Perhaps it’s a bit of both. SPACs have been around since the mid-90s and will likely be with us for decades more. They will continue to be a useful tool as investors need liquidity and as startups are attracted to a more straightforward path to going public. We can be fairly confident, however, that 2021 will prove to be a high-water mark.

Performance in the public market

So how did the eVTOL SPACs perform? In a word, poorly. But this is not unlike the SPACs seen in other sectors: almost every SPAC has fallen short of expectations, and so it’s difficult to extract how much of the poor performance is due to the broader market downturn versus the suitability of the SPAC as a financing mechanism.

SPACs have fallen short of expectations across several industries.

Almost a year and a half after Joby’s IPO, we now have enough data to do some early comparison between the various publicly-traded eVTOL companies. For nuance and rigor, you’ll want to read my Q&A below with Edison Yu, but here are my quick thoughts on a few of the more interesting stocks: JOBY, ACHR, and EVEX.

Joby Aviation (JOBY)

Joby was one of the earliest eVTOL companies to IPO, and has long been viewed as the market leader. The company boasts the highest trading volume among its peers, with a three-month average volume of 3.22M. Coming off a high of $12.78 after its NYSE debut certainly hurts, but JOBY continues to perform well relative to other eVTOL stocks.

Archer Aviation (ACHR)

Archer is also traded at relatively high volumes with a three-month average of 1.67M. Some industry leaders believe the stock is undervalued due to the fact that the company has similarly impressive technology to Joby, but with more aggressive certification and delivery timelines.

Eve Air Mobility (EVEX)

Eve made its debut on the New York Stock Exchange in May of 2022, which makes it the most recent of the major eVTOL companies to go public. Eve benefits from being a spin-out of Embraer, a major aircraft manufacturer headquartered in Brazil. Eve’s relationship with Embraer has kept its stock price high, but it has also raised eyebrows. Embraer owns most of the company and is presumably holding its shares for the long term (or at least through a three-year lockup). This has propped up the stock price, making EVEX the leader of the eVTOL stocks in terms of price. Trading volume, however, is extremely low. We’ll see whether Embraer’s majority-ownership strategy works in the long term.

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Edison Yu, Deutsche Bank’s expert on eVTOL stocks

Now for the good stuff. Edison Yu was kind enough to spend some time sharing his thoughts on the current landscape for publicly-traded eVTOL companies.

Edison Yu publishes eVTOL research as a Director at Deutsche Bank

You’re one of the few voices commenting on this sector from the perspective of a large bank. When did you decide to start covering eVTOL companies and why?

I was covering the early days of EV stocks, and after spending a lot of time analyzing Tesla, I pivoted to other EV companies. As time went on, there was a general consensus around EV adoption, and it had become a super well-covered development, so I thought to myself: what's next?

Every major automaker now has a multi-billion dollar EV strategy. There are dozens of EV startups, and all the major governments want to pivot to electrification. So there wasn't really much controversy or debate anymore. 

So I thought to myself, what's next? As I started to speak to people in the eVTOL world, it just seemed to me that we were on the cusp of something different. Aviation is an industry that has basically been unchanged for the last 50 years, and I started getting deja vu. In the early EV days, no one really took electrification seriously; no one thought it could happen. The incumbents were very slow. It’s really deja vu: the EV revolution is happening all over again, but for the sky.

I started to talk to people like Mark Moore (CEO of Whisper Aero) and Adam Goldstein (CEO of Archer Aviation), and I started to realize that although public adoption may be difficult, the technology was already de-risked. The regulation was evolving too, so a lot of the ingredients were there.

I don't think the transition will be as smooth as it was for electrifying cars, but the end game seems to be that we need some sort of electrification strategy for the sky. We’re in the very early era of advanced air mobility.

Part of my thesis for starting this newsletter is a prediction that we’ll eventually see the same kind of enthusiasm for the AAM space as we did for Tesla and the other EV companies. One thing that’s interesting this time around is that the eVTOL companies have already gone public, and I wonder if the fact that retail investors can get involved right now helps push the industry forward. At some point, people are going to want to board these vehicles and understand the passenger experience. So I'm curious, when do you think the general public gets interested in eVTOL?

I think the investment cycle was sort of a double-edged sword. You have five publicly traded eVTOL companies—six if you include EHang based in China. When the market was hot—when people were very excited about next-gen growth—this works in your favor. But we are not in that type of market anymore; we're in a very different macro backdrop where capital is scarce. So in that context, a business that isn't going to do any revenue for 2-3 years and possesses a very uncertain profitability profile will not resonate with institutional investors. Many investors will simply pass on the opportunity even if the fundamentals improve, preferring to revisit in the future when the investing backdrop has improved.

At a more personal level, the issue faced by AAM is that it has more stringent regulation than the auto market. During the early days of Tesla, you could drive a Roadster and then Model S relatively easily. You can’t fly in an eVTOL right now, and that will be the case until we’re much closer to certification. So there’s a disconnect between the customer and the vehicle that you didn't have with personal cars.

The other issue is that you don't really have anybody in eVTOL like Elon yet. Whether you like him or hate him, he has been a tremendous force in the EV sector. Beyond the product/technology, he played his PR and marketing game better than anybody else. Replicating that for the eVTOL sector is not straightforward.

I’m sure some eVTOL CEOs would like to have that Elon Magic, but it's really hard to bottle that up.

I once asked someone who worked at Tesla, “Why didn't Elon go after eVTOLs?” The response was, “Well, I don't know exactly what's going on in his mind, but from what I know, he doesn't want to deal with all the regulation.”

He’s always pushing the boundaries on rules and regulations. You cannot do that in aviation because the margin of error is so small due to safety concerns. You can sort of get away with it when the margin of error is high: make bold claims, be a little bit late on certain things, etc., but that just doesn't fly in aviation.

So, SPACs. In hindsight, do you think the SPAC was a wise fundraising mechanism for eVTOL companies?

I'm probably not the best person to answer this question because I'm not the one facilitating the deals, but I would say two things.

One, this wasn't a phenomenon limited to advanced air mobility. In late 2020 and most of 2021, everybody was trying to do a SPAC regardless of industry. Was it good in the sense that it provided liquidity for a bunch of private companies that maybe would not have gotten it had they tried the traditional routes? Maybe. Would some of these really high-quality companies have been funded anyway? Yes.

The second thing I would say is that because so many companies went the SPAC route—because liquidity and capital were so readily available—it created an oversupply of speculative growth stocks across many verticals. It scarred a lot of people because overly optimistic forecasts were made, and it tarnished the SPAC asset class in general. Even good companies were under quite a bit of selling pressure from investors last year.

It seems to me that compared to SPACs in other sectors, eVTOL companies have roughly delivered on their promises. Would you agree with that?

There are a few things to process there. First, there was this notion during the SPAC boom that UAM was this multi-trillion-dollar market that these companies would be able to tap into. I think that was overhyped. As people did more work and realized how hard it is to certify these vehicles and to actually deploy them, they concluded that the very punchy, trillion-dollar TAM projection probably wasn’t happening anytime this decade. That's not necessarily a comment on the individual company, but a lot of people threw that number around.

The second thing: the FAA adjusted its certification framework which set back Joby’s original timeline and created some uncertainty for the industry. Adding to that challenge, the regulations in Europe are different and generally considered more “strict.”

The third thing: while operational progress is being made, I think investors underestimated the technical developmental challenges. You really need a lot of capital to develop the right aircraft and powertrain underneath.  Archer is probably the one that has delivered most closely on its promises yet still has a lot of capital. Vertical and Lilium are facing a much more challenging financial condition.

From what I understand you’re more bullish on Archer than Joby.

Yes, absolutely. From a stock perspective, I'm much more inclined toward Archer for a couple of reasons: one, from a valuation perspective, Joby is trading at about four times the value of Archer, and granted some of that is probably deserved because they have a lot of proprietary technology, they’ve made the most progress, they've flown the most, etc. So there are certain metrics that you can use to justify that valuation, but I don't think it should be that big of a gap.

Second, operationally speaking, I don't think Joby is actually as far ahead as perceived anymore. The type certification timeline is the same now—the end of 2024 for both. They're neck and neck in terms of progress. Beyond that, Archer is a more de-risked story because their vehicle design is more conservative in my view. There are a lot of reasons for that: it weighs more so there's a lot more room for error when it comes to getting the structure and payload balance right. Joby chose to vertically integrate a lot of aspects of the aircraft which has presented challenges and added incremental risk. 

Then I would say one very recent development has de-risked Archer more than Joby. The Stellantis-Archer deal is very encouraging. Stellantis is going to help set up the manufacturing. They make millions of vehicles every year, so they have a lot of experience here. It's not aerospace grade, so they're going to have to learn stuff too. If you had any concerns about manufacturing, you would at least trust these guys more than you would a startup that was doing it for the first time.

But Joby has Toyota to help with their manufacturing, right?

Yes, but that’s a different type of deal. It could obviously evolve, but Toyota is mainly a financial investor. They send some people to work with Joby, but it’s not like Stellantis — Stellantis is the manufacturer for Archer at large scale. They are going to own the plant, hire the people, and spend the money.

Stellantis doesn’t just de-risk Archer from an operational side, but also in terms of capital. Joby will still have to spend all the money on manufacturing, whereas Stellantis is spending the money and resources to set up production. It’s a much deeper relationship than what Toyota and Joby have.

Of course, we don't know: ultimately, maybe Toyota and Joby do this too. But at the moment, if you have Stellantis willing to spend hundreds of millions of dollars—essentially becoming the Foxconn of eVTOL—I think that's pretty encouraging. If you're concerned about execution, this should help you alleviate your fears about Archer doing well.

Joby and Archer have cash on hand, and they have partnerships to get them across the finish line. What mechanisms will other eVTOL companies turn to for capital? Are they going to go back to the public markets? Are they going to venture firms? Are they going to bring on debt? How do eVTOL companies stay alive in this current climate?

Assuming that operational progress continues, I do think there are other avenues to raise money. One is through a “strategic”—a large aerospace and defense company, a large tech company, or a large automobile company. There is appetite—as we’ve seen with Stellantis and Toyota—from some very well-funded entities out there to have a presence in eVTOL. You see Hyundai in Korea, Honda in Japan, Xpeng in China. So there are several examples of strategic partnerships. You may ask, why haven't they done something already? Quite simply,  there's no rush. Certification, especially in Europe is probably a 2025 or 2026 story. There's no rush to do it, so I'm not surprised that no one has really made a big move. But there are many strategic entities out there with a lot of money that could come in and help. It has to be a big entity because you need hundreds of millions of dollars at least. By that logic, you can rule out venture capital because VC is not going to commit that kind of money to an effort like that.

The second option is government, especially in Europe, because there is a very big desire—in the UK for example—to cultivate their aerospace industry. It’s the same thing in Germany. If you look at the landscape, the aerospace industry in Europe is heavily  French-dominated (see Airbus, Safran). In the UK, Germany, and maybe even Italy, there's a big desire to invigorate the local talent pool, so it's possible that you could get some sort of quasi-bailout from the government.

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A message from my friends at Strativ Group

Strativ is the go-to recruitment agency for engineers and organizations working with some of the most exciting and disruptive companies in the world. Over the past three years, the team at Strativ has recruited more than 1,000 individuals globally into the eVTOL & AAM space. Our mission is simple, we want to enable the development of technologies to make the world a better place for everyone. Here are some roles we’re currently hiring for: