Aurora Innovation: Growing Hype As Commercialization Approaches

seekingalpha11-26

Aurora Innovation's recent share price rebound has been driven by speculation regarding regulatory tailwinds, but the company's success hinges more on technology performance than regulations.While ...

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Justin Paget After a significant share price decline caused by a minor delay to its commercial launch, Aurora Innovation (NASDAQ:AUR) has rebounded in recent weeks on the back of speculation regarding regulatory tailwinds. I tend to think the importance of this is overblown, though, with the rollout of autonomous vehicles far more likely to be dependent on the performance of the technology than regulatory barriers. I previously suggested that while Aurora had a relatively large cash balance, its cash burn meant that a sizeable raise was likely. This occurred in the third quarter, significantly extending Aurora's runway but probably not providing the company with enough cash to reach breakeven. While I believe that Aurora is reasonably priced given its long-term potential, I continue to think that it is unattractive from a risk-reward perspective in the short-term due to its large market capitalization, lack of revenue and the likely time required for the company to fulfill its potential. Market Conditions While the strength of the freight market will eventually become an important consideration for Aurora, the company is currently far more dependent on the performance of its technology and its ability to achieve cost parity.   Table 1: Estimated Autonomous Truck TCO Advantage in 2035 (source: Created by author using data from Aurora Innovation)Labor shortages, long routes and a weak train network are all tailwinds for autonomous trucks in the US and as a result, McKinsey expects adoption in the US to be the fastest globally, with 13% of heavy-duty trucks expected to be autonomous by 2035. Trucking is a $1 trillion market in the US and a $4 trillion market globally, and McKinsey believes that autonomous heavy-duty trucking could be a $600 billion market by 2035:  China - $327 billion US - $178 billion Europe - $112 billion  Penetration will ultimately be dependent on cost and performance, with operations initially limited to longer routes and transfer between distribution hubs in restricted geographies. A fully autonomous solution will enable DC to DC operations, but McKinsey doesn’t believe that this will occur until after 2040. Launch Delay Aurora recently delayed the commercial launch of its driverless trucks until April 2025, causing its stock to plummet. This only represents a 4-month delay, though, which was attributed to the need to complete additional safety measures. The delay is immaterial to Aurora’s value, unless it is indicative of deeper problems that will lead to further extensions of the commercialization timeline. I don’t believe this is the case, though. Aurora is trying to deploy a complex product and is rightly prioritizing safety and product performance over speed. Aurora Business Updates Before launching commercially, Aurora must close its safety case for the Dallas to Houston launched Lane. This is quantified using the Autonomy Readiness Measure, which is a weighted measure of completeness across all claims in the safety case. Aurora’s Autonomous Readiness Measure stood at 97% at the end of October. Aurora believes its solution has been validated for most highway driving conditions, and the company is now focused on refining performance on surface streets and rarer construction scenarios. Validation of the Aurora Driver’s perception system is also virtually complete, with over 400 modes validated and just six remaining. The company is also still finalizing work related to redundant systems.   Figure 1: Aurora Safety Case Framework (source: Aurora Innovation)In addition to the Autonomous Readiness Measure, Aurora assesses the performance of its system using the Autonomy Performance Indicator, a measure of commercial readiness. The indicator penalizes the use of onsite support, which will be the most expensive type of support needed to enable the Aurora Driver. 80% of commercial loads on the Dallas to Houston lane had 100% API in the third quarter. Aurora is targeting approximately 90% API by commercial launch and doesn’t believe this metric will ever reach 100 percent, as certain situations will always require on-site support. Figure 2: Aurora 100% API Loads (source: Aurora Innovation)In addition to ongoing pilot programs and testing, Aurora recently hosted J.J Keller and Road Master so that they could assess the proficiency of the Aurora Driver, with these organizations finding that the system met or surpassed the standards expected of a professional driver. While this is a positive, I would expect these types of systems to generally perform to a high level. Performance is more likely to be limited by the system's ability to safely manage novel scenarios. Aurora is in the process of introducing its solution to the Dallas to El Paso route and plans on extending this to Phoenix in 2025. The Fort Worth to Phoenix lane spans over 1,000 miles and takes at least 15 hours to complete, making autonomy a compelling solution. Aurora expects to begin commercial pilots on this lane in the first half of 2025 and intends to introduce a fully driverless solution later in the year. Aurora expects to rapidly scale its service given the self-similarity of the US interstate highway system. This notion is supported by the fact that Aurora’s Team recently completed bidirectional mapping of the El Paso to Phoenix route in two weeks, and the Aurora Driver navigated most of this route autonomously in its first trip. Figure 3: Illustrative Lane Expansion through 2026 (source: Aurora Innovation)Aurora continues to haul freight for its pilot customers, including FedEx, Werner, Schneider, Hirschbach and Uber Freight. The company also recently signed Schneider as a launch customer, and its expected launch capacity is now fully contracted. The company is also in the final stages of contracting its remaining second half capacity. Aurora is currently scheduling close to 160 commercial loads per week, up more than 100% YoY. In total, Aurora has delivered more than 8,200 loads and driven over 2.2 million commercial miles. Financial Analysis Aurora expects to operate in a 50 billion VMT serviceable addressable market by the start of 2028, with 61% of this coming from routes where hours of service restrictions come into play for human-driven trucks. Given that Aurora has hinted at DaaS pricing in the 65-85 cents per mile range, this suggests a revenue opportunity of up to $37 billion. Even if Aurora has a large market share initially, competition is likely to increase over time though, limiting the company's market share, unless it has a materially lower cost basis. Aurora has suggested that it will have around 10 autonomous trucks at launch, with only one of those expected to be driverless initially. In the second half of 2025, Aurora plans on increasing capacity to tens of trucks. While this has the potential to validate Aurora's solution, 2025 revenue will be immaterial (millions of dollars). Competition will also be important from a pricing perspective. If there are more than a few viable competitors, a race to the bottom on pricing could develop. The probability of this could be increased if smaller freight operators are priced out of the market first, leaving companies like Aurora with a concentrated customer base and limited negotiating power. Even with competition, there will be plenty of opportunities for companies to concentrate on different lanes in order to limit this, though. Given Aurora's business model, low freight prices will also not necessarily impact Driver-as-a-Service pricing. Aurora is targeting SaaS like gross margins, which should lead to a high operating margin if the company achieves sufficient scale. This will ultimately depend on the hardware costs of Aurora's driver (potentially in the $50-$100 thousand range), support requirements and DaaS pricing. Aurora currently expects to be able to operate at least 10 trucks per remote assistance specialist by the end of 2025, with this ratio continuing to improve going forward. Similarly, on-site support requirements are also expected to decline over time. I can see Aurora achieving a net profit margin approaching 30%, but there is a large amount of uncertainty in this estimate given the variables involved. Figure 4: Remote Assistance Specialist to AV Trucks Ratio (source: Aurora Innovation)Figure 5: On-Site Support Frequency (source: Aurora Innovation)Aurora generated $834,000 pilot revenue in the third quarter, up 75% YoY, although this is being recorded as a contra R&D expense. The company's operating expenses totaled $196 million, with $35 million in stock-based compensation. As a result, Aurora used approximately $143 million cash in operating activities during Q3 and CapEx totaled $7 million. Aurora is anticipating $175-$185 million cash usage in the fourth quarter, with 2025 quarterly cash burn expected to be similar. Aurora raised $483 million in gross proceeds from a public offering of common stock in the third quarter. As a result, the company ended Q3 with approximately $1.4 billion in cash and investments. This liquidity is expected to support Aurora’s operations well into 2026. Depending on how quickly the company's revenue ramps and how fast support resource requirements fall, Aurora could burn something like $2 billion cash on its way to breakeven. This makes another large raise likely at some point in the next few years. While this could be important if Aurora's share price crashes, dilution is a minor risk at the minor. Competition Competition is not a primary concern at this point in time, but it will become an important consideration in coming years due to the potential for a race to the bottom on pricing. Aurora’s main competitor is probably Kodiak at the moment although Waymo and Tesla will also probably seek to introduce autonomous solutions in the future. Kodiak has transported more than 3,900 loads to a distance in excess of two million miles and is currently transporting over 50 loads per week. These figures are broadly in line with Aurora, although Kodiak has transported less loads on longer routes. The company is developing a similar footprint to Aurora, which is likely driven by the suitability of certain routes. This could become problematic from a pricing perspective as these companies try to scale their operations, though. Kodiak's expansion efforts appear to be somewhat more mature. For example, the company has already mapped over 18,000 miles and has established a number of hubs (Villa Rica, Dallas-Fort Worth, Houston). The biggest differentiator between Kodiak and Aurora at this point in time is probably Kodiak’s exposure to off-road applications and defense. For example, Kodiak has demonstrated its self-driving technology on a RIPSAW M3 ground vehicle targeted at defense applications. To do this, Kodiak fitted modular SensorPods that have been designed for military use to the vehicle's corners. Kodiak has been working with the US Army since 2022. Aurora is also collaborating with Atlas, a proppant supplier, on the autonomous delivery of proppant to frac sites. While this requires Kodiak to navigate dirt roads, the low speeds involved make it an ideal application of its technology. Early next year, Atlas plans on launching commercial operations using its first two trucks equipped with the Kodiak Driver. Valuation While I believe that Aurora is currently worth around $25 billion (assuming it successfully scales a commercial service and maintains its position as a market leader) an argument can easily be made for a valuation anywhere in the $0-$125 billion range. This is because it is simply too early to know how the market will develop, and in turn what margins, market size, market share, etc. will ultimately look like. Success in trucking probably more than justifies Aurora’s current market capitalization. For the company to create strong returns, meaningful success will be required internationally and in adjacent markets like local goods delivery, though. Conclusion Aurora is a credible company on the verge of commercializing its self-driving technology. While this is an important step forward, Cruise's experience is illustrative of the risk involved in scaling self-driving operations. Aurora's recent raise helps to derisk the company somewhat, but it will likely be several years before the viability of its technology and business model are better understood.  While Aurora is a market leader, it is difficult to differentiate Aurora and Kodiak based on publicly available information. In addition, competition will eventually increase, even if this takes time. The size of the market means that success could provide significant upside, but I tend to think that the risk-reward trade-off is currently unfavorable due to the uncertainty involved and the long path to breakeven. The recent rise in share price has been driven by sentiment more than fundamentals, leaving Aurora vulnerable if there is a pullback in the broader market, or there are further commercialization delays.","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":"4.29.4","shortVersion":"4.29.4","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/2486037799"}