The Rundown – Your weekly SPAC Deep Dive (10/17/21)
This week we have a very special Rundown, covering a tech company that I think is going to have a massive impact on the logistics industry across the world. Our deep dive is presented by Aurora Tech, a company I had the chance to go visit in person a few weeks ago! I was skeptical as I hopped into the back of their truck’s cab, and for the majority of the ride I was monitoring the wheel and the internal computers, but it’s safe to say that this thing works.
Aurora Takes on Tech Giants Google & Tesla
Aurora, a self-driving technology startup, recently announced a SPAC merger with Reinvent Technology Partners Y, valuing the company at $13 billion. Aurora primarily develops hardware and software for autonomous driving with the company’s stack being dubbed Aurora Driver. The company was established in 2017 by three high-profile veterans of the autonomous driving industry. The team at Aurora includes Chris Urmson, who is the former CTO of Google’s self-driving project (which is now Waymo), Sterling Anderson, and Drew Bagnell, who were the former heads of Tesla’s autopilot and Uber’s self-driving projects respectively.
Aurora’s Level-4 self-driving technology uses LiDAR, Computer vision, and high-definition maps of roads. The company has accumulated 14 million miles on public roads and 5 billion miles of simulated driving to test its autonomous features so far. AUR has integrated and tested its autonomous tech with partners high-profile partners including Volvo, Toyota, and PACCAR (Owners of Peterbilt), all of whom have invested in the company. Aurora has also partnered with Uber from whom the company bought its self-driving unit in 2020. The acquisition has ensured that Aurora has access to both Uber’s expertise and funding.
Autonomous Tech Could be the Foundation for Supply Chain Logistics
The market for autonomous vehicles in the US is estimated to be $835 billion. While most autonomous tech companies have focused on the passenger mobility segment, Aurora believes that the Trucking segment is ripe for disruptions and is focusing its efforts on the industry. The trucking industry is a very lucrative market, especially considering that it generates 20x revenues of the passenger mobility market ($700 billion vs. $35 billion). In addition, self-driving trucks are a much less competitive market to break into with fewer technological pitfalls.
Plenty of companies have tried to solve the technological challenges of autonomous passenger vehicles including Apple, Google, Tesla, Uber, Lyft, and none have succeeded so far. Apple has had to restart its autonomous car project three times over the last five years, both Uber and Lyft sold their self-driving business and even with Google’s unlimited resources, Waymo has had a limited launch and remains unprofitable. AUR aims to reach L4 autonomous mobility, which is relatively easier to achieve in trucks compared to passenger vehicles. Trucks spend a majority of their time on the highways, where they don’t have to deal with traffic congestion, pedestrians, and unprotected turns. The timing seems apt as well given that Autonomous Vehicles now feel more like a necessity than ever before, with factors such as driver shortage (approximately a 60,000 shortage currently, up to 160,000 in the coming few years) and a large number of accidents causing massive delays in deliveries.
Huge price increases and delivery delays are the new norms, with small businesses struggling to cope with the slowdown in the supply chain. Even large companies are not immune to the issues and have had to increase prices between 8-10% across the industry to compensate for the increased costs. L4 Autonomous driving will increase vehicle operating hours, driver access, and network efficiency and safety. If Aurora can solve the technical challenges, it will have access to a huge market, in which both Volvo and PACCAR have a sizeable share. AUR recently announced a partnership with FedEx and PACCAR to test a 500-mile pilot program in Texas, which could be the first step towards achieving its goal. Should AUR succeed in its trucking business, it can use the profits to fund its continued Research and Development of autonomous tech for passenger vehicles and delivery vehicles in urban areas.
Aurora Connect and Aurora Horizon
While Aurora isn’t rolling out its self-driving trucks until 2023 and its ride-hailing vehicles until 2024, the company is launching its product offerings through a driver-as-a-service model. The company’s trucking service, which is dubbed ‘Aurora Horizon’ will provide trucking carriers and private fleets with scalable driver supply powered by the Aurora Driver.
‘Aurora Connect’ on the other hand is AUR’s ride-hailing subscription service, which will allow vehicles with the company’s driver technology to integrate ride-hailing network software, enabling it to be used as a taxi. Subscription to either Aurora Horizon or Aurora Connect will also have access to a mission control system called Aurora Beacon, a roadside assistance program, and extended support called Aurora Shield. The company’s subscription model places it unique amongst its peers (essentially a SaaS offering) and may help increase margins over time over time.
Financials and Valuation
The euphoria surrounding autonomous tech has led to massive valuations for companies within the industry. It’s hard to judge Aurora’s financials, given that the company isn’t generating any revenues. The company doesn’t expect any revenues till the end of 2023, and won’t break even till 2027. Aurora has been piling up losses of $94 million in 2019 and $214 million in 2020. As the company inches closer to commercial delivery, it expects losses to widen further. Given the history of companies with lofty projections before the SPAC merger missing their deadlines, AUR stock can see a huge dip if the company under-delivers. Aurora Horizon/Aurora Connect will play a larger part a few years after it is introduced and may account for between 20%-30% of revenues and a larger part of the company’s EBITDA.
In the company’s investor pitch deck, management stated that there is a possibility that its technology may have limited performance or take longer to complete. The company’s Management believes that AUR is cheaper compared to peers like Cruise (Valued at $30 Billion in 2021) and Waymo (Valued at $31 billion in 2020), but both companies are held privately and any technological risks may result in valuations taking a nosedive. There are a lot of uncertainties/variables that can spell disaster for the company, making an investment in the company uncertain at the moment. Investing in AUR seems like an opportunity that can easily be 50x but just as easily goes to zero as well.
The biggest risk for the company is that it misses its deadline of commercial production in 2023, which results in a larger than expected cash burn. Aurora will be in a race against the clock to start commercial deliveries before it runs out of the $2 billion in cash that it generates from the SPAC merger. Another risk that the company should consider is that there is no guarantee that the merger will generate $2 billion if the recent SPAC redemption numbers are anything to go by. Finally, there is a substantial technological risk that hangs over the merger. Competitors have tried and failed before but the competition for autonomous tech is now intensifying with companies like Tesla, Waymo, and Cruise continuing to fund development. There is a substantial risk that one of AUR’s competitors develops superior technology or goes to market before the company which can cause problems for the company. Aurora has stated that they are “not worried” about any company coming to market ahead of them as their niche focus on trucking-first provides differentiation with their competition.
Self-driving startup Aurora is an exciting bet on the future of the autonomous trucking industry. While so many startups are trying to capture trends in the passenger vehicle segments (EV+Self-driving), AUR is looking at a much larger market, with a lower barrier of entry. The company, which boasts leadership from the likes of former heads of autonomous programs at Waymo, Tesla, and Uber is just a few years away from delivering full self-driving.
Given that supply chains in the US and all around the world are struggling to move goods, AUR’s autonomous tech will bridge the potential labor shortage in the future. But while the idea is sound and relatively free of risk much of the company’s valuation will depend on management’s execution. Just like other high-growth startups that have gone public through a SPAC merger, AUR has been fairly aggressive with its projections. As things stand, there is too much uncertainty around delivery estimates and production dates. But should management reach the set of projections that it has laid out, the stock would be a clear winner, even at its current valuation.