Short Sellers, SPACs and the Future of Flying Cars
(Bloomberg Opinion) -- When EHang Holdings Ltd. first sold shares to the U.S. public in December 2019, investors weren’t exactly sold on the rare chance to bet on the future of flying cars. The Chinese company makes “electric vertical take-off and landing” (eVTOL) aircraft, which function a bit like a helicopter but are powered by batteries and have multiple rotors. Its passenger drones are pilotless, too, unlike those of most of its rivals.
EHang’s listing — a traditional initial public offering underwritten by Morgan Stanley and Credit Suisse — raised just $41 million and valued the company at less than $700 million. Since then it has been caught up in a surge of excitement about the development of air taxis, and at the start of this week it was worth $6.8 billion.
On Tuesday its share price suffered a serious malfunction. More than 60% of its value went up in smoke after a short seller, Wolfpack Research, published a report questioning EHang’s sales relationships, technology and regulatory approvals. EHang said the report contains “numerous errors, unsubstantiated statements, and misinterpretation of information.”
Regardless of the rights and wrongs of this particular episode, it shows the risks of investing in futuristic technology companies. A huge amount money is also being pumped into the nascent air-taxi industry by special purpose acquisition companies, or SPACs, a method of taking businesses public that’s all the rage in the U.S.
There is, at least, something behind the investor excitement. Long considered a dream best left to “Blade Runner,” air taxis could soon become reality thanks to advances in batteries, software and lightweight materials. It helps that star fund manager Cathie Wood may include “drones, air taxis and electric aviation vehicles” in her new space-themed exchange-traded fund. But shareholders need to do their due diligence as well.
Wood will soon have several other publicly traded air-taxi companies to pick from, thanks to a recent rush of SPAC deals. (SPACs are listed vehicles that merge with a promising business and thereby take it public — avoiding the laborious route of an old-fashioned IPO.)
From a SPAC financial sponsor’s perspective, flying cars are a potential marriage made in heaven. Thanks to a regulatory loophole, SPAC targets are allowed to publish very optimistic financial forecasts, which helps them secure eye-watering stock-market valuations. Suddenly, air-taxi manufacturers have found themselves able to raise massive amounts of capital. A typical development program for these vehicles costs up to $1 billion.
The EHang saga may be a one-off, but values are inflated across the sector. I doubt whether the match will always be a happy one for amateur investors who buy into these air-taxi visions.
Joby Aviation, Archer Aviation and Blade Urban Air Mobility have all announced SPAC mergers in recent weeks, or reportedly will do so soon. Germany’s Volocopter and Lilium have also been linked to SPAC deals. Meanwhile, former Boeing Chief Executive Officer Dennis Muilenburg’s SPAC may pursue something in “advanced air mobility.”
Letting SPAC targets publish multi-year financial projections — no matter how wild — gives them a huge advantage because most are still in the development and testing stage. Traditional IPOs don’t allow this forecasting. In air taxis, getting the required regulatory permits could take years, which makes future profit estimates partly guesswork. Volocopter’s development is relatively well-advanced but it doesn’t expect to start commercial services in Singapore until the end of 2023.
SPAC-acquired Archer confidently projects it will have more than $12 billion of revenue by 2030 and almost $3 billion of yearly free cash flow, even though it hasn’t yet manufactured or delivered any aircraft to customers. Some skepticism is warranted.
Regardless, Archer’s merger with investment banker Ken Moelis’s Atlas Crest Investment Corp. valued it at $3.8 billion if you include the $1 billion of cash raised. Based on where the SPAC shares are trading now, Archer’s equity value has increased to $5.3 billion, while Blade is worth $1.5 billion. Joby, which is quite advanced in the crucial certification process, expects to be valued at almost $6 billion, according to the Financial Times. For context, Italy’s Leonardo SpA, one of the biggest helicopter manufacturers, is valued at 3.6 billion euros ($4.4 billion).
In fairness, electric air taxis may prove to be cleaner, cheaper and quieter than helicopters, which means the market could be larger. Having multiple rotors may alleviate safety concerns.
It’s not just idealistic start-ups who are excited by the technology. Aerospace giants Airbus SE and Boeing Co., carmakers Hyundai Motor Co., General Motors Co. and Stellantis NV, and tech companies Tencent Holdings Ltd. and Intel Corp. are all investing in a Jetsons-style future, too. Former Airbus CEO Tom Enders has joined Lilium’s board. Spanish infrastructure company Ferrovial SA is planning a network of “vertiports” in Florida.
With dozens of air taxis under development, the companies that raise most money will have the best chance of survival. However, cash doesn’t guarantee success. The battery fire that engulfed a Lilium prototype last year shows what can go wrong. The complexity of what these companies are attempting, combined with a long regulatory approval process, means most will gobble up piles of cash. Public-company investors are accustomed to financial improvements each quarter and aren’t known for patience.
“This is one of those ‘hard world’ problems — high capital costs, advanced hardware technologies, long timeline, and an overall very challenging business with low chances of success,” Archer’s co-founders have written, with refreshing honesty. Nonetheless, they are still getting the chance to try.
In a manifesto lamenting venture capital’s failure to support bold technologies, Peter Thiel once opined that, “We wanted flying cars, instead we got 140 characters” (then the maximum length of a tweet). For better or worse, SPACs may have changed the equation.
For now Blade offers helicopter rides. It plans to deploy eVTOLs once these become available. It buys aircraft time rather than owning the machinery.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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