Less than four months ago, we did a deep dive into the first pure play in self-driving semi-truck stocks with a profile on TuSimple (TSP). We found the business to be intriguing but opted to sit on the sidelines for now until the company puts more miles on the road and money into its bank account. We’re bullish on the self-driving theme in general – the technology is there – but it’s going to be a long haul to gain regulatory approvals, mainstream adoption, and profitability. That’s not stopping the race to the public markets. Two more self-driving semi-truck startups are headed in that direction through reverse mergers with special purpose acquisition companies (SPACs): Embark Trucks and Plus. Is either one worth putting on our watchlist?
The Business Case for Self-Driving Semi-Trucks
In our profile on TuSimple, we outlined some of the practical advantages and economic incentives accelerating the development and commercialization of self-driving semi-trucks. In sum: Most freight miles (nearly 80%) are on major highways, which are less complicated for autonomous driving systems to navigate. Labor accounts for more than 40% of total per mile semi-truck operating costs – if you can find the drivers, especially for long-haul freight. Self-driving semi-trucks could operate 24/7 in a sector worth nearly $800 billion in the United States alone, according to American Trucking Associations.
We also spent some time in the same article describing the competition, which includes not just driverless trucking startups like Embark and Plus but also autonomous vehicle companies like Tesla (TSLA), Aurora, and Waymo, among others. Most of these companies are working on some version of Level 4 (L4) autonomous technology for Class 8 semi-trucks. L4 refers to the degree of automation. In this case, the vehicle is capable of performing all driving functions in certain conditions, such as a car share in a pre-defined geographic area. Class 8 semi-trucks are the classic 18-wheelers you see barreling down the highways.
Three Four Self-Driving Semi-Truck Stocks
[Editor’s Note: We interrupt our regularly scheduled article to include a last-minute addition: Self-driving startup Aurora just announced yesterday that it would also merge with a blank check company. While not purely focused on the semi-truck industry, Aurora has targeted Class 8 vehicles as one of its primary markets. More on the SPAC below.] The below graph illustrates some of the differences between the public and soon-to-be-public trucking companies (minus Aurora for obvious reasons), with the caveat that it was created by Embark for its investor deck, so the comparison is obviously prejudiced:
For example, one of the leading venture capital firms, Sequoia Capital (or its counterpart in China) has invested in all three companies. TuSimple, in particular, has a pretty impressive list of investors, including Goodyear (GT), UPS (UPS), Volkswagen (VOW3.DE), and Nvidia (NVDA). In addition, Plus had a technology partnership with Nvidia, which is the world’s leader in AI hardware. In fact, if we were the cynical kind (and we are), the chart seems to be a bit jingoistic, playing up Embark’s made-in-the-USA bonafides against the fact that the other two companies have connections to China. While we can ignore the rah-rah patriotism, ignoring the world’s second-biggest economy is a big red flag for us.
The other interesting bit here is how the chart breaks out each business model, with Embark claiming to be primarily a software-as-a–service (SaaS) company. Regular readers of Nanalyze know that’s one of our favorite models for investing because it provides a predictable stream of recurring revenues. Let’s dig into Embark first with that in mind.
A SaaSy Self-Driving Semi-Truck Stock
Founded in 2016 by a couple of robotics prodigies who met at university in Canada, San Francisco-based Embark had only raised about $117 million before inking an agreement with Northern Genesis Acquisition Corp. II (NGAB) in June to go public later this year. The deal will reportedly value the company at about $4.5 billion (more than half of TuSimple’s current market cap of $10 billion) and net the company about $614 million. In addition to Sequoia Capital, Tiger Global Management is a leading investor.
Embark has positioned itself primarily as an autonomous vehicle SaaS company focused on trucking. Its flagship product is Embark Driver, a machine learning system that “identifies the most relevant detections and provides the most useful insights into critical edge cases.” By identifying the most valuable data automatically, the platform can focus on labeling and training the system to improve performance over time. Perception data is fed into the company’s Vision-Map Fusion (VMF) system, which is built on top of the standard high-definition (HD) maps created by sensors such as LiDARs, radars, digital cameras, and GPS. VMF enables the Embark Driver software to respond to new situations where the HD map may be out of date, such as in a construction zone with lane closures. Embark claims its system has driven more than one million real-world miles.
Embark has also developed a standard sensor and computer module called Embark Universal Interface, which is designed to interface with most major steering and braking actuators. Both the module and software can reportedly be used on just about any semi-truck.
Embark Driver is a subscription-based model where carriers pay a per-mile license fee for the software and a suite of supporting services. Those services include Guardian, Embark’s cloud-based dispatch and monitoring solution. The company estimates that its technology can save carriers 80 cents per mile, and it shares a portion of those savings with its partners, leaving a gross revenue rate of 44 cents per mile. There’s some additional back-of-the-napkin arithmetic involved that brings gross profits in at 32 cents per mile. Embark expects it will only capture about 1% of its serviceable addressable market by 2024.
The company currently has about a half-dozen partners, including Anheuser-Busch InBev (BUD), Hewlett Packard (HPE), Werner Enterprises (WERN), Mesilla Valley Transportation, and Bison Transport. It’s a start but we’re not too revved up. Partnerships and $5 might get you a coffee at Starbucks these days. What we want to see are paying customers in the form of revenues. (More on this in a bit.)
Making a Hard Turn on the Hardware
Also founded in 2016, Silicon Valley-based Plus is going down a different road. The company has raised $520 million, pocketing a whopping $420 million earlier this year in an extended Series D. So it was a bit of a surprise (and not) to see Plus jump on the SPAC crazy train last month by proposing to merge with Hennessy Capital V (HCIC). The deal will net Plus about $500 million and a valuation of $3.3 million. Last month, Plus filed an 8-K with the SEC noting that they entered into a master purchase agreement with Amazon (AMZN) that “provides for the purchase of at least 1,000 Plus Retrofit units.” The deal is subject, of course, to Plus meeting forecasted volumes and delivery schedules along with a host of other caveats. In the same announcement, Amazon is granted warrants which represent 20% of Plus’s outstanding stock at 46 cents per share “with full vesting upon cumulative payments of $150,000,000.” Telling your vendor that you want 20% of their company if you spend $150 million with them is a BSD move.
Amazon is investing billions in everything from warehouse automation to drone delivery. The proposed stake in Plus would be far from its first foray into self-driving technology. Last year, it bought a Silicon Valley startup called Zoox that had raised $1 billion in funding. Amazon has also kicked some cash curbside to Aurora, and a couple of years ago it was kicking the tires on Embark’s autonomous trucks.
So what about Plus has piqued Amazon’s interest? Let’s start with the technology, which is more about the hardware compared to Embark Trucks. The PlusDrive employs a suite of sensors including radar, LiDAR, and thermal cameras to collect data about its environment. The system identifies objects nearby and predicts their movement, as it plans its course and makes its next move. The company claims its multi-modal sensor system “solves vibration and long-range camera drift problems for mass production, as well as adequately addresses adverse weather and lighting for commercial deployment.”
Plus has tested PlusDrive in both the United States and China. The latter has involved 62,000 total miles driven in 130 runs to date, with calculated fuel savings of up to 20%. A similar pilot program in California had similar results, with the trucks operating autonomously 90% of the time in both cases. Plus claims fleet operators can boost gross profit per truck by 30% to 70% using its self-driving technology.
Plus plans to begin mass production of PlusDrive Class 8 vehicles this year with FAW, the largest manufacturer of heavy trucks in China. In addition, Plus has already started delivering its initial batch of PlusDrive-enabled retro-fit units for existing semi-trucks in the United States. The company estimates it will sell more than 300 of its Supervised L4 (SL4) units this year and bring in about $16 million between the two countries, with most of the revenue concentrated in China. The SL4 system still requires drivers in seats, while the company’s L4 that supports full automation should be available in 2024.
A big test for Plus will be their ability to execute on an order from the largest company in the world – which apparently has them by the cojones. If in a year Plus has sold some trucks to Amazon, and actually realized $16 million in 2021 revenues, we may come back around for a second look.
One Self-Driving System to Rule Them All
The three-way race between these massively capitalized companies was upended yesterday when Silicon Valley-based Aurora announced it would go public through a reverse merger with Reinvent Technology Partners Y (RTPY). The deal would pour about $2 billion into the new company’s account and immediately value it at $13 billion. That’s on top of the $1.2 billion the startup has already raised, with a current valuation of $10 billion. Aurora brings to the table an impressive list of investors, including Shell (RDS-A, RDS-B), Uber (UBER), Hyundai (005380.KS), Amazon, Baillie Gifford, Greylock, T. Rowe Price, and (once again) Sequoia Capital. Many of these previous investors are putting more cash into the pot for the big splash with the SPAC.
Most of that money has gone toward building the Aurora Driver – a hardware, software, and services platform designed to be integrated with vehicles of various makes, models, and classes for multiple commercial applications. The company has custom-designed its hardware sensor suite, which includes cameras, radar, and its proprietary FirstLight LiDAR. Aurora claims its LiDAR technology is superior to anything currently on the market because it uses something called frequency-modulated continuous-wave technology versus brief light pulses at a fixed frequency. Investors just need to understand that FirstLight boasts twice the range and doesn’t suffer from external interference.
Of course, there’s a lot more under the hood powering the self-driving platform, from machine learning to simulated driving using synthetic data.
While the company has integrated its Aurora Driver platform into eight different vehicles, it plans to tackle the self-driving semi-truck market first. In the S-4 form filed with the Securities Exchange Commission, Aurora laid out the value proposition for autonomous trucking: “[W]e believe its massive scale, significant structural need, attractive unit economics, and self-similar operating environment will allow us to rapidly deploy and profitably scale on high-volume, highway-focused routes.” The plan, somewhat similar to Embark, is to offer a Driver as a Service business model, where partners subscribe on a per-mile basis. In other words, the company has no intentions of operating its own fleet. Instead, fleet owners will purchase Aurora Driver-powered vehicles from its manufacturing partners, subscribe to the Aurora Driver, and use related Aurora-certified services. Sounds familiar.
The S-4 form actually provided more transparency than normal for a SPAC deal. For example, we know Aurora is pre-revenue and lost nearly $190 million in the first quarter, so it’s probably eager to close this deal. According to their revenue estimates, the next time to check back in would be in 2024 to make sure they landed $31 million in revenues from self-driving trucks and to see who their customers are.
To Buy or Not to Buy
We don’t buy pre-revenue companies as a rule, so opening a position in any of these companies is out of the question. Sure, TuSimple has some revenues, but they’re not meaningful (they don’t exceed $10 million per annum). Another reason to avoid TuSimple is that they trade under a VIE structure, and we’re staying away from that for the same reason we exited Ali Baba.
Then there’s Embark which expects (checks notes) $869 million in revenues to automagically appear on their books in 2024.
That’s hardly the typical trajectory of cash flows for a SaaS business, which Embark claims they are. Frankly, even dividing these revenue forecasts by ten seems optimistic. Any MBA who actually uses those numbers to try and value the company should be taken out back and shot, which brings us to another important point.
All of the companies we’ve talked about today are promising large sums of money to arrive at future points in time. This means the present value of those cash flows would be very sensitive to interest rates. Here’s how the present value of a dollar changes over time based on a low interest rate (1%) and a high interest rate (5%).
|5% Interest Rate||$ 100.00||$ 90.70||$ 86.38||$ 82.27||$ 78.35|
|1% Interest Rate||$ 100.00||$ 98.03||$ 97.06||$ 96.10||$ 95.15|
As you can see, the higher the interest rate, the less valuable future revenues are as time goes on. The whole lot of these companies are very sensitive to a rise in interest rates, even more so if they’re taking on large amounts of variable interest rate debt to get there. Regardless of where you see interest rates going, this represents an external risk that can’t be controlled.
It’s far too early in the game to be trying to pick a leader in autonomous trucking. We’ll keep an eye on which companies start to generate meaningful revenues, then we’ll place our bets. For those of you with a higher tolerance for risk, don’t buy any SPAC until the deal is finalized.
On paper, all of these companies look pretty strongly positioned in this emerging market. Still, it’s all very superficial. You only have to look at souped-up SPACs like Nikola Motor Company and Momentus Space to see how easily it is for these companies to
mislead investors provide incorrect forward-looking information. Unlike IPOs, SPACs are allowed to make forward-looking statements, and pundits talk about it as if that’s a good thing.
And we also need to consider the Ark Effect: Leading technology fund manager Ark Invest has already added TuSimple to its flagship Ark Innovation ETF (ARKK). Will they triple down with Embark, Plus, and Aurora? If they do, it’s going to make for one volatile ride.
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