Blade Air Mobility: Attractive Business, Growth Visibility, And Undervaluation

seekingalpha11-08

Initiating coverage on Blade Air Mobility with a “Buy” rating, citing a unique business model and undervaluation.Blade's medical segment, particularly organ transportation, is a significant growth and...

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I believe that Blade has a unique business model and the stock is undervalued. This initiating coverage discusses the fundamental factors that make Blade stock worth considering at current levels of $3.7. As an overview, Blade Air Mobility is involved in air transportation and logistics for hospitals across the United States. The company claims to be one of the largest transporters of human organs for transplant. Further, the company provides passenger transportation services, with helicopter and fixed wing services primarily in the Northeast United States and Southern Europe. The core idea is to provide air transportation alternatives in congested ground routes in the United States. For FY 2023, Blade Air Mobility reported revenue of $225.2 million, which was higher by 54% on a year-on-year basis. Of the total revenue, 56.2% was from the “MediMobility” organ transplant segment. The remainder of the revenue came from passenger transportation services. For the same period, the company reported adjusted EBITDA of $5.8 million. It’s worth noting that Blade stock has remained largely sideways for year-to-date. I believe that a breakout on the upside is impending after an extended period of consolidation. It’s however important to understand the reasons for Blade stock trading sideways. In my view, there are two important factors. First, Blade Air Mobility is relatively under-the-radar and that has contributed to limited price-action. Second, for 2023, Blade reported revenue growth of 54% on a year-on-year basis. However, revenue growth has decelerated to 12.4% for the first half of 2024. Third, Blade Air Mobility reported positive adjusted EBITDA for 2023. Further, adjusted EBITDA losses have narrowed significantly for the first half of 2024. However, the markets seem concerned about slim EBITDA margin. Having said that, these factors are digested in the current stock price. The focus of the bull thesis is on factors that are likely to mitigate these concerns. Medical Segment Will Boost Growth and Margins The biggest reason to be bullish on Blade Air Mobility is the medical segment. The company is a provider of air and ground organ transportation services for transplant centers and organ procurement organizations. Currently, this segment has a dedicated fleet of 20 jets and more than 30 vehicles. There are three important reasons to believe that the business can create significant value. First – The organ transportation business has grown at a CAGR of 3.7% between 2010 and 2023. However, with rising demand, new technology, and regulatory change, the business has grown at a CAGR of 8.2% between 2021 and 2023. In a fragmented organ transplant market, Blade Air Mobility has ample scope for growth.   Company Presentation August 2024Second – For FY 2023, the company’s medical business grew by 76% on a year-on-year basis to $126.6 million. For the same period, the passenger revenue increased by 33%. Further, for the first half of 2024, the passenger segment revenue was flat on a year-on-year basis. On the other hand, the medical business grew by 21.6%. It’s clear that the medical business is the growth driver and I expect this trend to sustain. Third – For FY 2023, the passenger segment reported adjusted EBITDA loss of $5 million. On the other hand, the medical business reported positive adjusted EBITDA of $10.8 million. As the revenue contribution from the medical segment increases, I believe that the company’s EBITDA margin will expand. Therefore, the medical segment is not only the revenue, but also the margin driver for the company. Fourth – Blade Air Mobility has a strong balance sheet that’s debt free. Further, the company reported a cash buffer of $142 million. With strong fundamentals, the company is looking at “low-risk investments in medical aircraft and vehicles and medical bolt-on M&A.” Any potential acquisition is likely to boost growth and support EBITDA margin expansion. Fifth – Blade Mobility is considering diversification within the medical segment. This includes ancillary services such as ground logistics and organ placement. Blade believes that the medical ground transport opportunity is significant with an addressable market of $200 million. Further, the company has already launched its organ placement service that offers hospitals outsourced organ acceptance, processing, and organ recipient logistics coordination. At the same time, Blade is looking into diversification towards other time-critical logistics verticals. These potential avenues of revenue can translate into growth acceleration in the next 12 to 24 months. Sixth – Blade Air Mobility was pursuing an asset-light business model. However, as demand increases, the company has inclined towards a mix of owned and contractual assets. In Q2 2024, the company acquired seven jet aircraft. An eighth was due for acquisition in Q3. I believe that if utilization is robust for owned assets, it’s likely to support EBITDA margin expansion. It’s worth noting that the acquired aircraft are “already delivering 30%+ returns on invested capital.” Considering these factors, I believe that the medical segment is likely to be a value creator. I must add that Blade has operations within the United States. As the company scales up, there is a strong case for expansion in international markets. Expecting Margin Improvement in the Passenger Business The passenger segment has been a disappointment in terms of growth and margins. As mentioned earlier, the segment revenue was flat on a year-on-year basis for the first half of 2024. I, however, believe that there are few reasons to be cautiously optimistic. Blade Air Mobility announced the restructuring of Canadian operations to curb operating level losses. The exit is likely to support margin expansion in the coming quarters. Blade has guided for “positive trailing-twelve-months passenger segment adjusted EBITDA in 2025 — or earlier.” If this holds true, I believe that Blade stock is likely to trend higher. Another important point to note is that Blade is looking at transition to electric aircraft. The likes of Joby Aviation (JOBY) and Archer Aviation (ACHR) are likely to commercialize eVTOLs in 2025. Once the low-altitude economy gains traction, Blade Mobility is likely to have a wider addressable market. Currently, the company’s short-distance travel is limited to New York and six cities in Southern Europe. As the network expands, there will be visibility for growth coupled with margin expansion on operating leverage. Blade has also been expanding its partnerships, that’s likely to translate into higher fleet utilization. In September 2024, the company announced a partnership with Qatar Airways. This will allow Qatar passengers to travel to Monaco on a single ticket, with the Blade helicopter providing a seamless connection. A similar partnership was signed in May 2024 with Emirates that “enables passengers to travel between Dubai and Monaco on a single, cost-effective ticket.” The partnership with Ocean Casino Resort will provide direct flights from Manhattan to Atlantic City. These partnerships are likely to support growth and capacity utilization. The flat revenue from the passenger segment can potentially be temporary. Further, there is a case for EBITDA margin expansion on cost-cutting and improved utilization. Risk Factors to The Thesis From a financial perspective, I believe that the risk is low. The company has a debt-free balance sheet and a healthy cash buffer. Additionally, there is visibility for EBITDA margin expansion in the next few years. However, the financial risk can potentially increase if the company pursues leveraged acquisition and the impact on growth is relatively muted. In my view, competition in the passenger segment can potentially intensify in the coming years. A key reason for this view is the development of the low-altitude ecosystem. Once eVTOLs are commercialized, there can be a significant increase in number of players operating in the short-distance air travel. This can negatively impact growth and key margins. The addressable market for urban air mobility seems significant. However, growth depends on the willingness of travellers to adopt air mobility over ground transport. I see affordability as a key factor. While the medical business is immune to economic downturn, the passenger segment growth is likely to be impacted. It’s worth noting that Blade Air Mobility commands a market valuation of just $290 million. The business is still at a nascent stage and stock volatility (beta) is high. Having said that, valuations seem attractive, and I don’t see significant downside from current levels. On the other hand, the upside potential is meaningful. Concluding Views I believe that some exposure to Blade stock can be considered before the company announces Q3 results. In the Q2 2024 commentary, the management indicated that “Q3 is off to a great start with solid growth” in the seasonal short-distance business, while “medical remains strong.” It’s therefore likely that good numbers will be reported and the stock can breakout on the upside. It’s worth noting that Blade Air Mobility has no direct peers. However, a forward EV/Sales of 0.69 and a forward Price/Sales of 1.18 is indicative of undervaluation. It’s also worth noting that Blade has guided for EBITDA of $10 million for FY 2025. Considering the current market valuation of $290 million and a cash buffer of $142 million, the EV/EBITDA (forward) comes to 14.8. With the potential for healthy EBITDA growth, the forward valuation is attractive.  My view is underscored by the point that four analysts have a 12-month median price target of $6 for the stock. This would imply an upside potential of 60.43% from current levels. Overall, I believe that the downside is capped for Blade stock and the upside potential is significant. Some exposure can therefore be considered at current levels.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2481079192"}