Joby Aviation (JOBY) pitch; The queen of bad speculating; Visit to Carleton College

1) In my January 17 e-mail, I wrote about "catching a certain kind of moonshot" – stocks "that go up 5 times, 10 times, or even 100 times."

As I said back then, I had recently given a presentation to my team at Stansberry Research about these kinds of stocks. In it:

I focused on a particular kind of moonshot: market-leading companies in sexy, exciting sectors that appeal to the media and retail investors...

Tech is, of course, what's sexy and exciting... but I'm only talking about a narrow subset of tech companies... [with] breakthrough technologies that capture retail investors' imaginations – which can result in parabolic stock moves...

I'm talking about electric cars, smartphones, video streaming, robots, and space tourism.

Then, on January 18 and January 19, I wrote about two stocks that I believed to have the same potential to become moonshots: air-taxi companies Joby Aviation (JOBY) and Archer Aviation (ACHR).

After outlining the thesis for them, I concluded:

I think Joby and Archer both have multibagger upside potential... but they're also super risky.

There's a not-insignificant chance that one or both of them could run out of cash and see their stocks go to zero (to understand how, see this short thesis on Joby that my friend Sahm Adrangi of Kerrisdale Capital Management published on October 10).

Thus, appropriate position sizing is critical. As I noted in my presentation, if I were running a hedge fund, Joby and Archer would be 3% and 1% positions, respectively.

Since January 19 to yesterday's close, Joby and Archer are down 17% and 22%, respectively.

And Joby recently popped up on my radar when someone pitched it on my favorite stock-idea website, Value Investors Club.

Only members can access ideas for the first 45 days after they're published, so I can't share the entire write-up. But it's well done, so I wanted to share excerpts now and I'll include the link once it's available to the public.

The author starts by addressing the first question any investor would likely ask:

What makes Joby different from [every] other "science project" SPAC [special purpose acquisition company] that went to zero?

The transition from helicopters and light aircraft to eVTOLs [electric vertical take-off and landing] 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... 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.

Later, the post author addresses the question is when the Federal Aviation Administration ("FAA") might approve Joby's aircraft for commercial flight:

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 Chief Safety Officer for Archer.

And as the post author notes, when it comes to Joby:

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 [European Union Aviation Safety Agency] 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 ["TC"] 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 [United Arab Emirates] General Civil Aviation Authority ["GCAA"] 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.

I share the post author's view that, in a downside scenario in which Joby fails to hit its milestones and isn't viable as a stand-alone company, there are any number of big companies that would swoop in to buy it for its technology and people.

As the post author continues:

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 [intellectual property], 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 [the] 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.

Lastly, the post author goes through the many risks and concludes:

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.

I can confirm that Joby has world-class talent.

When I visited the company in September, I was accompanied by a friend who is a Stanford-educated mechanical engineer and I felt like I was watching a Stanford nerd reunion.

He knew many of the Joby executives, including the CEO, and was blown away by the electric motor, battery, and other technology they've developed.

In summary, while I no longer think Archer is an interesting speculation, I'm more convinced than ever that Joby is.

That said, I want to emphasize the word "speculation"...

This stock could easily go to zero and will be volatile, so anyone who owns it should size it appropriately.

2) There's good speculating and bad speculating...

The queen of the latter continues to be ARK Invest's Cathie Wood, about whom I've been warning my readers for years (archive here).

Here's an article in today's Wall Street Journal about her latest struggles: Cathie Wood's Popular ARK Funds Are Sinking Fast. Excerpt:

Cathie Wood's investors are jumping ship.

They rushed into her funds and won big during the pandemic, when the star fund manager became a social-media sensation by making bold bets on disruptive technology stocks such as Tesla, Zoom Video Communications and Roku. They largely stuck with her when the funds' fortunes reversed after the Federal Reserve raised interest rates. Now, after years of bruising losses, many of them have had enough.

Investors have pulled a net $2.2 billion from the six actively managed exchange-traded funds at her ARK Investment Management this year, a withdrawal that dwarfs the outflows in all of 2023. Total assets in those funds have dropped 30% in less than four months to $11.1 billion – after peaking at $59 billion in early 2021, when ARK was the world's largest active ETF manager.

And as the article continues, ARK Invest's flagship ARK Innovation Fund (ARKK) is underperforming this year:

Hopes that the Fed will eventually pivot to cutting interest rates, along with excitement over generative artificial-intelligence technology, have pushed the S&P 500 up 5% in 2024. Those bets should benefit the ARK funds, too. Instead, shares of the flagship ARK Innovation fund have slumped 19%.

If you have made the mistake of investing in one of Wood's funds, it's not too late to get out (as so many others are doing).

As an aside, note that ARK owns 0.48% of Joby, worth $15 million, and 8.8% of Archer, worth $103 million... once again demonstrating Wood's poor stock picking and position sizing.

3) My wife Susan and I were in Northfield, Minnesota last weekend...

It's about 45 minutes south of Minneapolis. We were there for parents' council weekend at Carleton College, where our youngest daughter, Katharine, is a junior (our oldest daughter went there as well, graduating in 2018). Here's a picture of us:

It's a wonderful school – everything a small liberal arts college should be – and we enjoy being on the parents' council, though it's mainly an excuse to visit Katharine twice a year.

The big news is that she has a boyfriend, whom we met over dinner on Friday night. Given what a good head is on Katharine's shoulders, we weren't surprised that he's a lovely young man.

But that didn't stop me from trolling Katharine...

I found this T-shirt on Amazon and texted an image of it to her, asking if it would be OK if I wore it to the dinner:

She was not amused – but she did forward it to her boyfriend, and it made him nervous, I'm pleased to report! (I joke that the only thing tougher than being my daughter is being my wife!)

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.