Sky High Expectations For Flying Cars

April 7, 2021 - Max Osbon (4 mins to read)

The future of the flying car, eVTOL (electric vertical take off and landing) has gained considerable attention over the past year. Most recently, several SPACs have helped bring eVTOL technology to public markets at multi-billion dollar valuations. Considering the rapid pace of innovation today, it’s worth considering whether the hype matches reality. How should investors think about this emergent flying car trend?

Progress compounds 

Innovative technologies grow on an exponential curve. Early days can feel impossibly slow while later stages grow by leaps and bounds that almost feel inevitable in hindsight. eVTOLs today would not be possible if it weren’t for improvements in battery tech, electric motors, data sensing and processing, and low cost manufacturing. 

Standford computer scientist Roy Amara said in the 1960’s, “we overestimate the impact of technology in the short-term and underestimate the effect in the long run.” Gartner’s hype cycle documents this phenomenon through five stages: Innovation Trigger, Peak of Inflated Expectations, Trough of Disillusionment, Slope of Enlightenment and Plateau of Productivity.

eVTOL is likely in stage two: Peak of Inflated Expectations. 

SPACs and intangible asset hype

Many entrepreneurs attempt to copy Elon Musk and his ability to captivate his fanbase with futuristic predictions. Nikola was a perfect example of this copycat strategy. Their electric truck SPAC is now down -80% from the highs last Summer and their founder, Trevor Milton, is under investigation for fraud and misleading investors. We wrote about this in July and August in The Triumph of Intangible Assets that founders sometimes abuse the power of storytelling around their company’s intangible assets. 

Prior to the March 2021 selloff, the average SPAC was trading at a 26.9% premium. That premium is now just 3.5%. The majority of the SPAC market is focused on early-stage innovative companies. There are three major flying car SPACs: QELLU (Lilium), ACIC (Archer), and RTP (Joby Aviation). Joby is probably the most exciting opportunity given the quality of their leadership, quality of their early investors, their quiet flight technology, and their first mover advantage.

The real power of eVTOLs is how quiet they can be. Helicopters are noisy at roughly 80 decibels from 500 ft. For context, a normal conversation is 60db and a motorcycle is 95db. Joby expects their noise range to be under 70db. That is much more appropriate for widespread residential and city use. 

Even still, commercial operations for Joby are expected to start in 2024 at the earliest. The price for RTP is down from a high of $15 to $10.15. For context, the starting value for a SPAC is $10. Most revenue projections for the eVTOL industry start around 2025 and glide into the multi-billion dollar range by 2030. Morgan Stanley predicts that eVTOL will be a $674b revenue/yr industry by 2040. Since we are multiple years away from the first commercially available eVTOL, we feel there is plenty of time to wait to invest in this industry.

It’s important to note that SPACs are allowed to publish outrageously optimistic multi-year forecasts. Traditional IPOs don’t allow forecasting per SEC rules. This difference in SEC rules is one core reason that SPACs have gained so much excitement from retail investors as well and negative press from those who are familiar with the traditional IPO rules.

Other businesses support this opportunity for innovation

There are many technologies that had to come before eVTOL. Advanced semiconductor technology allows for data sensing and processing to coordinate and control electric motors. Low-cost manufacturing via 3D printing helps with rapid prototyping to speed up the invention and testing process. 5G connectivity and other wireless tools allow for safe unmanned test flights from a control room. Advanced simulation and optimization tools often use AI to generate a digital twin (a copy of the real model that simulates the physics of the real environment). Battery innovation and advanced electric motors technology from companies like Tesla also help with the pace of innovation in the eVTOL space. Electric motors in particular are powerful, nimble, and use fewer parts than traditional internal combustion engines.

Helicopters require regular disassembly and reassembly of the engine for maintenance purposes. The cost of this maintenance is almost equal to the cost of buying a brand new helicopter altogether. Electric motors and battery sensors will dramatically reduce the maintenance complexities. Ultimately the goal will be an inexpensive and safe electric aircraft available for the masses. We chose to highlight this category because eVTOLs have been in the news lately, especially due to the recent SPAC activity. The eVTOL technology is revolutionary but it will take a number of years until you will see your first eVTOL in person. In the meantime, the semiconductor industry and industries mentioned above that enable eVTOL experimentation are a great source of opportunity for investors. The Jetsons (1962) popularized the concept of flying cars. Nearly 60 years later, we’re inches away from that reality. Commercialization is a few years away, but this is a sector to keep an eye on.

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