Description

Long Joby. Yes, I know I am in enemy territory with this pitch. I like the challenge. Long FNMAS, short TBBK, now long JOBY. I will make sure to see a therapist after this writeup. Also, let me just get this out of the way. Do I think the SPAC projections were asinine / aggressive as hell? Yes. So how do I come out long? High-level view boils down to the people, the product, and the market. I think current positioning in the auto tech space and Joby’s current valuation offers a compelling entry point. I view Joby as a venture-esque bet with substantial upside and decent margin of safety relative to most venture bets. I would put the name in the same bucket as other top-tier hard tech startup such as Groq, SpaceX, and Helion.

I also assume everyone reading this knows Joby and / or has been short the name at some point in time. If the name is somehow new, here is a third-party video of the electric vertical takeoff and landing (eVTOL) aircraft Joby is currently developing and is in the process of getting certified with the FAA. The company’s business model is to design, manufacture, and operate an air taxi service.

What makes Joby different from ever other “science project” SPAC that went to zero? The transition from helicopters and light aircraft to eVTOLs appears inevitable. Capital outside of traditional aerospace has flooded into eVTOLs, given the long-term opportunity to develop an aircraft that is faster (200 mph top-speed), quieter (68 dBA in takeoff), and safer (redundancy in motors, no Jesus nut risk) than traditional helicopters. Also, Joby is the clear market leader. This differs from all the EV SPACs, which were never a viable threat to Tesla. To underwrite Joby going to zero, I think you must underwrite the eVTOL industry going to zero. Given the long-term prospects of developing a better aircraft than today’s helicopters, I think that scenario is very doubtful. More important, Joby has been able to raise capital outside of its SPAC transaction on attractive terms. The company raised $820mm prior to its SPAC deal ($30mm Series A, $100mm Series B, $590mm Series C, and $100mm Uber investment) and $340mm since coming public ($60mm from Delta, $180 from Baillie Gifford, and $100mm from SK Telecom). Joby’s SPAC raise was not a one-off, and follow-on raises were done either at or above the closing price of the date in which the investments were made. This separates Joby from every other SPAC.

Intro:

I heard a story recently about Jeff Yass that inspired this writeup. Essentially, Jeff wanted to play a round of golf at his home course, Stonewall, with a few friends. One of Jeff’s friends complained it would take 45 minutes to get to the course and recommended playing at a different course closer to him. Jeff said, “yeah, but it takes 15 minutes with my helicopter.” Jeff and his buddies ended up flying onto the driving range at Stonewall and played a round. To me, that convenience proposition is what Joby’s aircraft enables, more than what is possible with today’s helicopters.

The value proposition for the electrification of VTOLs is greater than that of cars, which is presumably what has attracted so much capital from outside the traditional aerospace manufacturers. Here is a 2013 white paper “A Multifunctional Rotor Concept for Quiet and Efficient VTOL Aircraft” laying out the vision for Joby Aviation, with the goal of “capitalizing on recent advances in electric motors, battery technology, and control systems to create revolutionary VTOL aircraft that are quiet, safe, and efficient.” The paper was written by Alex Stoll (Alex unfortunately passed away in a car accident last year), Edward Stilson (still with Joby), and Bevirt. Going electric in aviation enables you to make the aircraft quiet, which Joby has achieved, driven by dramatically lower rotor tip speed. I have seen video of Joby’s aircraft taking off, and from about 100 feet away, the aircraft registered ~68 dBA. In forward flight, the aircraft registers ~45 dBA at an altitude of 1,640 feet. There is also the added safety benefit from redundancy. Electric motors are smaller and lighter than engines, which allows you to have many of them rather than one. The drawback is the weight of batteries, which limits range and payload.

eVTOL Market

From 2020-2022, the passenger eVTOL industry raised ~$10bn. Since then, capital flowing into the space has dried up, presumably due to macro factors coupled with slower progress than initially projected. Joby has twice the cash level (~$1bn as of 4Q23) on its balance sheet than its nearest public competitor, Archer. Part of the rationale for why the timing on the long thesis for Joby makes sense right now is that as capital has dried up, Joby has emerged as the clear leader in the space. They have by far the most cash with the right product (i.e. 5-seater with a wing) and have made the most progress both on the technical side and regulatory side. 

The capital required to certify an eVTOL and scale manufacturing is perhaps the biggest hurdle in the eVTOL space. This narrows down the competitive landscape to Joby, Archer, Beta, and Volocopter, as well as corporate-backed companies such as Boeing’s Wisk and Hyundai’s Supernal. Second, you must have an aircraft that can offer a higher value proposition over time and address a large market. Two-seater multicopter eVTOLs like Volocopter’s aircraft are limited. They are more susceptible to adverse weather conditions, are less efficient with slower cursing speeds, and can only carry one passenger. Beta has made little progress on the VTOL side of their ambitions, as they aim to certify their CTOL aircraft first. Wisk aims to go straight to autonomy with their aircraft, and they have also had turnover at the C-suite level. Hyundai’s Supernal has also had executive turnover and has yet to fly its prototype. This effectively narrows it down to Joby and Archer.

Archer, perhaps the only viable competitor given its cash position and 5-seater eVTOL ambitions, has yet to achieve full transition with their aircraft. Joby achieved full transition in 2017. Full transition, which is when you fly with the rotors tilted forward and generate lift from the wing, is perhaps the most difficult part of rotorcraft. Flying in forward flight is crucial to maximizing the range of an eVTOL due to its lower energy consumption. Archer’s inability to achieve full transition is most likely due to the aircraft design which has fixed aft rotors. The backstory as to why Archer chose its design is that, in its early days, the company hired a consulting firm FlightHouse to design their aircraft. The co-founders’ background was in finance and neither had technical expertise. With the help of eVTOL industry veteran Mark Moore, Archer settled on its current design which uses fixed aft rotors. This was disclosed during the discovery process in their lawsuit with Boeing-backed Wisk. The use of fixed aft rotors, according to Supernal CTO, creates “a lot of unfavorable characteristics” when in forward flight, particularly “large asymmetries on the blades.” Unless Archer changes its design, I find very little reason to believe its aircraft has even a chance at being certified by the FAA.

Archer also recently demoted its COO Tom Muniz to CTO, which coincided with the resignation of its Chief Legal Officer. My guess is that there is a power struggle ongoing related to the engineers Archer hired from Apple SPG, and the direction of the company / morale is heading in the wrong direction.

I would also highlight a part of the Archer story that is a bit technical. They raised some capital from Ark last summer and now Ark has been in the open market buying stock every now and then, typically at 10% of the daily volume when they’re buyers. Stellantis also has been buyers in the open market in the past. Both Ark and Stellantis have been sizable buyers over the past couple of months, and yet the stock is still down a decent amount from where Ark and Stellantis were buying stock. I think given Archer’s technical progress and current cash position, the end appears near for the company. My view is that Joby emerges as the clear leader, and another OEM-backed eVTOL company such as Supernal remains in the competitive landscape but not a viable competitor to Joby.

Archer, like Joby, has faced a couple of short reports. Archer’s most recent short report focused more on the poor culture at the firm, which Joby has shown no signs of to date. I think the key part left out of the Archer’s short reports, however, is the aircraft design and the impact of fixed aft rotors during forward flight, as mentioned above. Management also has little credibility, and both strategic investments Archer received came in the form of equity at a discount coupled with penny warrants. Given the short thesis on Archer differs significantly from Joby, I think a pairs trade of long Joby, short Archer makes sense if you are in a seat with tight risk parameters. Even if you are thinking Joby is a short long-term, Archer’s equity will most likely be wiped out before Joby’s equity is impaired. I would note borrow costs this year on Archer has ticked up to a little bit above GC.

Joby Background

Joby was founded in 2009 by CEO JoeBen Bevirt. Before Joby Aviation, JoeBen founded another company called Joby which made gorillaPods. JoeBen used the capital from the venture to start Joby Aviation. In 2014, Pinterest co-founder Paul Sciarra became Executive Chairman after making the first outside investment in Joby. In 2016, Capricorn led a $30mm Series A investment in Joby. Joby’s first-generation full-scale aircraft began flying in 2017, in which it also completed the world's first full-scale vectored thrust eVTOL transition during that year. In 2018, Joby raised $100mm in a Series B led by Intel Capital, and included strategic investors Singapore-based EDBI, JetBlue Technology Ventures, and Toyota AI Ventures. The round also included participation from new investors Allen & Company, AME Cloud Ventures, and Ron Conway, as well as existing investors Capricorn Investment Group, 8VC, Sky Dayton, and Paul Sciarra. In January 2020, Joby raised $590mm led by Toyota Motor Corporation. Prior investors, including SPARX Group, Intel Capital, Capricorn Investment Group, JetBlue Technology Ventures, Toyota AI Ventures, and AME Cloud Ventures, also contributed to the round, and were joined by new investors Baillie Gifford and Global Oryx (ALJ family’s investment arm).

In 2021, Joby came public via a Reid Hoffman-backed SPAC. The structure of the SPAC was one of a few deals in which the SPAC promote was entirely at risk. The promote vests at different tranches: $12, $18, $24, $32, and $50. The sponsor also invested $115mm in the $835mm PIPE. I would venture to guess if all SPACs had this structure, we never would have come to experience the SPAC bubble that occurred.

My checks on the company indicate the culture is world-class, and it shows from the absence of turnover. Perhaps this stems from the early days of Joby in which the company exhibited a very much “married to the game” type culture. I recommend reading this article from Business Insider that dives into the about the company’s culture during its early days. There is a slide in Reinvent’s SPAC investment memo, shown below, on Joby that highlights nine executives. All of them are still with the company. Again, married to the game. If someone could find me another pre-revenue “science experiment” with this sort of loyalty and commitment I would love to know so I could possibly invest in that company as well.

Regulatory Progress

The regulatory backdrop, both with the FAA and internationally, appears favorable, despite the reputation of the FAA being a slow-moving organization. In 2023, the FAA issued published “Innovate28,” a plan that aims to allow for eVTOLs to operate at scale by 2028. In addition, current FAA Administrator Michael Whitaker was most recently COO at Supernal, Hyundai’s eVTOL division. Other FAA heads involved in the eVTOL space include former FAA Administrator Michael Huerta, who serves on the Board of Joby, and former FAA Administrator Billy Nolen, who serves as as Chief Safety Officer for Archer.

In March 2024, the FAA issued its final airworthiness criteria for Joby’s eVTOL, a first in the eVTOL industry. The FAA has separated from EASA on certification standards. In the FAA’s final airworthiness criteria for Joby, the FAA showed that it is pursuing 10-7 – 10-8 safety standards whereas EASA has been saying they want to certify at 10-9 safety standards (i.e. single failure cannot cause a catastrophic event in one in a billion flight hours). Joby’s current target for FAA Type Cert is late 2025 but probably gets pushed into 2026 over the next couple of quarters. More important, Joby has said publicly that it expects to launch its service first in Dubai. Joby says in its 10K that Dubai service could precede FAA Type Certification, stating “the RTA agreement includes a roadmap for local approval by the UAE General Civil Aviation Authority that could precede type certification by the FAA.” I think most shorts are underwriting the scenario that Joby must have FAA TC for its aircraft before beginning commercial services. Joby’s progress with the UAE GCAA indicates that is not the case.

Manufacturing Progress

As mentioned earlier, the biggest constraint with eVTOLs is battery weight. In order to manufacture an eVTOL that can deliver on payload and range targets, given current battery constraints, you have to essentially manufacture everything in-house. By not being reliant on third-party vendors, Joby can redesign various parts of the aircraft with a tighter feedback loop and improved performance. The analogy here is SpaceX. An example of this would be Joby’s direct drive electronic propulsion unit, the Joby Direct Drive, which eliminates the need for gearboxes. This saves ~100kg of weight for the aircraft, or the equivalent of one passenger. This results in an aircraft that competitors cannot compete with on performance, as they remain reliant on third-party vendors that are not optimized for eVTOLs.

Joby has a powertrain and electronics engineering and manufacturing facility located in San Carlos, California, as well as 130,000 square feet of additive and subtractive manufacturing, machining, aircraft assembly, and flight test facilities in Marina, California. The Marina pilot line is expected to have the capacity for one aircraft per month by year end, and long-term target is up to a couple dozen a year. I think this approach to manufacturing from Joby has been very methodical and coincides well with their timeline for certification and the scaling of their business. They are in the process of fine-tuning and expanding their pilot manufacturing line in Marina, California before they expand to a high-rate production facility planned for Dayton, Ohio. The risks of scaling manufacturing too quickly, and ending up with a situation like Lucid, is reduced. The Dayton factory is expected to support the manufacturing of 100s of aircraft.

Framing the Valuation

The global helicopter market size was valued at $57bn in 2022 and is projected to grow from $59bn in 2023 to $76bn by 2030 (Link). The market for light and ultralight aircraft is a little less than $10bn and expected to grow to $18bn by 2028 (Link). Morgan Stanley has thrown out a $1tn TAM for eVTOLs by 2040. So, what do I think the eVTOL market will be in 2035 or 2040? Honestly, I have no clue. In the early 1980s, McKinsey concluded that the total market for cellphones would be about 900,000. As mentioned earlier, if Joby’s first-generation aircraft can provide a superior user experience to today’s helicopters at a competitive price, I feel confident in that the market size will be large enough that Joby’s current valuation is extremely compelling, not to mention the inevitable subsidies during its early days. Again, they have no meaningful competition, so the launch of their service, if properly executed, will create significant barriers to entry from other eVTOL players (i.e. costs to certify aircraft, capex spend, etc.)

I view the best way to approach a base case valuation is by using some sort of 2035 / 2040 TAM approach. Manufacturing and the service should start to rapidly expand towards the end of the decade and early 2030s. The combined TAM of helicopters and light aircraft is nearly $100bn by the end of the decade. If Joby can capture 20% of that market, at 15% EBITDA margins, with a 15x multiple, that gets you to a $45bn valuation. Assuming the equity gets diluted by half, that gets you to a high teens IRR. I expect investors to factor in autonomy at some point. This should further juice the TAM and improve margins. With Joby seemingly the only viable player as it stands, this is how the upside scenario can play out (i.e. increased TAM, increased margins).

With respect to dilution, I wanted to highlight Joby’s history of capital raises and why I think shorts are underestimating Joby’s ability to raise on favorable terms. The SPAC accounted for about half of the $2.2bn Joby has raised to date. Since the SPAC, Joby has raised $340mm. The first was a $60mm investment from Delta at $5.43. The closing price on the day of the agreement (10/7/22) was $3.91. There are also warrants that vest at $10 and $12 for an incremental $140mm contingent on certain milestones. The agreement can be terminated if Joby does not receive FAA Type Certification by the end of 2026. Joby also raised $180mm from Baillie Gifford at $4.10, the same price as the closing price on May 3, 2023. On June 27, 2023, SK Telecom invested $100mm at $6.65. The closing price that day was $6.39. This was the day before Joby announced the production launch for its pilot manufacturing line, in which the stock squeezed to over $10 per share. Joby’s ability to raise on favorable terms has been one of the many factors that has separated the company from every other EV, eVTOL, or battery company that has come public via SPAC.

The investment thesis for incremental capital is compelling. Joby is the furthest along in the FAA Type Certification progress with the most cash, best technical talent and culture, and highest performance aircraft. They also have no credible competition. Logical investors for incremental capital include auto OEMs, aircraft OEMs, hard-tech investors / big tech, Middle East tech-focused money, and anyone that attends Allen & Co’s Sun Valley Conference (Allen & Co is an investor / advisor to Joby). Recent raises in the hard-tech space include Figure AI which just raised $675mm at a $2.6bn post-money valuation with little to show for. Self-driving trucking company Aurora raised $820mm last summer. Apple spent more than $10bn on Project Titan before cancelling its EV project. So far, Joby has raised money from Toyota, Uber, and Delta, a logical source for further capital raises. I would note that Uber invested further into Aurora last summer. Therefore, I think the likelihood that Joby raises on favorable terms, or better terms than shorts envision, is very high.

With respect to downside valuation, let’s assume the short thesis is that Joby is a zero. How does this play out? Joby has $1bn in cash, more than double its nearest peer, Archer. If Joby is a zero, one would have to underwrite that every other eVTOL company is a zero as well. The industry raised ~$10bn from 2020-2022. Joby’s aircraft is quieter, faster, and cleaner than today’s helicopters and will only improve over time. They are the clear market leader, have developed the most IP, and have the best technical talent and culture. And now, they have no credible competition. I believe the investment thesis in Joby is stronger than at any point in its history. I think downside scenario is that Joby gets acquired from a strategic such as Boeing, Airbus, Toyota, or some big tech that can provide the necessary capital to grow the business. The long-term investment thesis will always be there for a suitable buyer, and despite the scenario of a hard landing, I still believe the progress Joby has made to date is compelling enough to have multiple interested bidders.

Joby Short Reports

Joby has caught a couple of short reports over the past couple of years from Bleecker Street and Kerrisdale. The name screens well for shorts given it is a pre-revenue company with high cash burn at a lofty valuation. High-level short thesis tends to be along the lines of “it’s a science project with a lofty valuation, that had insane SPAC projections, therefore it’s a short.” I also heard a short thesis pitched at a Monness ideas dinner that focused on related-party transactions. This stems from early days in which employees lived in tents and yurts on JoeBen’s Santa Cruz property. Again, I think it was more “hey here’s a pre-revenue company with a decent sized valuation, therefore short, and now let’s work backwards to argue the short thesis.”

Neither short report questions Joby’s market leadership nor their technical talent. The short theses tend to focus on the SPAC projections, FAA Type Certification timeline, and the unit economics of Joby’s ridesharing service. Again, much of my investment thesis lies on the technical talent and culture Joby has cultivated over the years as well as their market-leading position. For neither short report to address these two factors gives me confidence in my thesis.

Bleecker Street said in 2022 when the stock was in the low $4s that it expected the stock to collapse over the next couple of years. The stock has mostly traded between $4 and $6 the past couple of years although squeezed last summer to above $10. Bleecker Street’s short thesis was predicated on the notion that Joby overstated their manufacturing ability. Essentially, Bleecker Street assumed the Marina pilot line, which is intended to have capacity to manufacture up to a couple dozen aircraft, would be Joby’s full-scale factory in Dayton, which is intended to manufacture hundreds of aircraft. Bleecker Street also focused on the SPAC projections. I don’t put too much weight into those projections, and I think the company has reset expectations as well to a more reasonable level. For example, Joby said in early 2023 that piloted tests would begin by year-end 2023, and they were done by October 2023. Joby also said that its first eVTOL off its pilot production line would be delivered to Edwards Airforce Base by early 2024, and it was delivered in September 2023. This compares with Archer, which said that they would be the first eVTOL company to deliver its aircraft to the DoD, yet Joby did this in September 2023 and Archer has yet to deliver an aircraft. In an interview in the summer of 2023 with Bloomberg’s Ed Ludlow, JoeBen stated how the industry is still in its crawl phase. I think that’s a fair assessment in terms of setting expectations over the next 2-3 years.

Kerrisdale published its short report in October 2023. I thought it was far better work than Bleecker Street’s work so I will address various points they bring up. First, Kerrisdale argues that Joby claims a 10,000-cycle life. My understanding is that Joby expects to get at least 10,000 flight cycles out of its batteries, not specifically 10,000 cycles. The company also told me they expect to replace their batteries once a year, so this checks out. They also question the safety profile / increased likelihood of vortex ring state (VRS) due to an increased disc loading of Joby’s aircraft. VRS occurs when a helicopter descends into its own downwash. Kerrisdale points out the Marana incident in 2000 in which an Osprey V-22 got caught in VRS and killed19 Marines. This was a nighttime exercise, and the pilot of the V-22 approached the landing site at an altitude of 2,000 feet above the intended altitude. As a result, the pilot maneuvered the aircraft to descend faster than it otherwise would have. As a result, the aircraft entered VRS and crashed into the ground nose first. I think the risk posed by VRS by Kerrisdale is overblown. Joby will first be flying under Visual Flight Rules (VFS), so this type of environment is nothing Joby will encounter. Also, VRS risk should be reduced as flights become even more automated, preventing the aircraft from even attempting such a descent that risks inducing VRS. Also, given the low tip speed of Joby’s rotors, which is a fraction that of helicopters, the likelihood of entering VRS during descent should help reduce the increased likelihood from a higher disc loading.

In addition to the technical aspects of the aircraft, they also focus on the economics of Joby’s intended ridesharing service. The most recent commentary from JoeBen in an October 2023 AP interview was that pricing of the service is expected to cost a little more than $5 per mile. Also, I think it’s a fair assumption to assume the industry will be heavily subsidized during the early days. Again, I think the 2035 story should remain the focus, as various factors such as improved battery performance, Wright’s Law, and autonomy should drive down CASM over time. If Joby’s first-generation aircraft can compete with the helicopter industry, offer a premium experience, and take market share, that pie is only going to expand over time as the aircraft improves.

Timeline

With respect to timing, I think Joby’s target for FAA Type Certification gets pushed into 2026 over the next couple of quarters. I would use any selling pressure from current levels as a buying opportunity, as the timeline for achieving FAA Type Certification further pressures other eVTOL players that do not have the necessary capital to progress towards FAA TC. Joby essentially has two customer bases right now, the U.S. military and Dubai, that cover their manufacturing capacity for the next 2-3 years. Manufacturing capacity is still limited, and Joby expects to be building at a run-rate equivalent of an aircraft per month by year-end. There will be a lag between capacity and aircraft rolling off the line, so this should equate to 8-12 aircraft rolling off the line in 2025. The current agreement with the U.S. DoD is for up to nine aircraft, with the potential to be expanded. Dubai should probably entertain up to 25 aircraft for its launch. Manufacturing in Dayton should ramp towards the end of the decade after Joby has received FAA TC. This is when the business should scale rapidly, and I think the equity will follow. Therefore, I think the entry point right now, allowed for by current sentiment within the auto-tech space (e.g. TSLA, RIVN, LCID, LAZR, QS, ENVX, etc.), is very attractive. This short-term sentiment will pass, and I think the focus will eventually shift to the value proposition Joby provides, both as a customer and as an investor.

Risks

I think the biggest technical hurdle that remains is getting the aircraft to the target 5,300 lbs maximum takeoff weight (MTOW). The current iteration is 4,800 lbs. A previous prototype was 4,200 lbs. My checks indicate that achieving full transition after increasing the MTOW will require some redesigns of dynamic components. What works at 4,800 lbs may not necessarily work at 5,300 lbs. Hitting the 5,300 lbs MTOW target is important to hitting the target payload of at least 1,000 lbs.

As mentioned earlier, I think FAA Type Certification gets pushed into 2026 over the next couple of quarters. Joby still can launch in Dubai prior to FAA Type Certification, and they also have the current contract with the U.S. DoD, so I do not put as much weight into this risk as shorts do.

There is also the risk that future capital raises end up being significantly dilutive to the equity. Again, previous raises have demonstrated Joby’s ability to raise on attractive terms. They are advised by Allen & Co, which also has a stake in Joby. This should continue to help with future capital raises. Similar to the Delta raise, they can effectively raise equity at a premium by selling their service. Neither short report addresses Joby’s most recent capital raises, probably because it does little to help their argument that Joby somehow will not be able to raise capital in the future. Again, the Joby investment thesis has become more credible over the past couple of years as they emerge as the only credible player in the eVTOL space. They have twice as much capital as the nearest competitor, have the lightest and quietest 4-passenger aircraft (driven by their technical talent, culture, and vertical integration approach), and are furthest along in certifying their aircraft. The end-state thesis for eVTOLs will always be there, in addition to the potential for autonomy, and the benefits of eVTOLs vs helicopters outweigh the benefits of EVs vs ICE (i.e. noise, safety, speed). Given Joby’s progress and market position, as well as the favorable regulatory environment (not to mention the inevitable subsidies), I am confident the downside scenario is far higher than shorts are most likely underwriting.

So, what would make me sell? Executive turnover. That’s it. Joby has world-class talent / culture developing a revolutionary product and has established itself as the clear market leader. This is coupled with the ability to raise equity on favorable terms. Given that, I think the risk-reward for being long the stock, when benchmarked against venture bets, is very compelling.

Relevant Links

• Joby Investment Memo
• Production Launch Slide Deck
• Joby NYC Third-Party Flight Footage
• FAA Issuance of Final Airworthiness Criteria
• Bleecker Street Joby Short Thesis
• Kerrisdale Joby Short Thesis

Catalyst

• Manufacturing Progress
• Hitting payload target
• Favorable capital raise