At one point last year, it really did look like everyone and their uncle had started an autonomous vehicle company and were going public. The sheer viscosity of the autonomous vehicle startups joining the NYSE and NASDAQ was overwhelming even by industry standards. the rise of CAPS. This would see investors looking to gain exposure to the sector against more than a dozen options with Embark common stock (NASDAQ:EMBK) and a plethora of other companies, including Aurora Innovation (AUR), Ouster (OUST) and TuSimple (TSP) up for grabs. To compound the ridiculousness of the situation, most of these are and remain fundamentally before earnings, so investors had to rely on vibes and intuition rather than hard financials to make a decision.
So the ruthless collapse of the nascent industry so far this year was not unexpected. So was Embark’s 1-for-20 reverse stock split after the company’s common shares fell below NASDAQ’s required $1 trading minimum. The scale of capital destruction is profound, with a nearly 80% drop in market capitalization from all-time highs for all companies in the space. Embark forms one of the worst performers with its share price down more than 95%.
Autonomous vehicle companies have collectively spent around $75 billion developing autonomous driving technology, but the industry is still very young and widespread adoption is still pending dissolving of regulatory bottlenecks and full development of the technology itself.
What’s next for the autonomous technology company?
First, just because its common stock has tanked doesn’t mean Embark’s mission to make the $700 billion-a-year trucking industry safer, more efficient and sustainable is inherently dead. Investors simply got too far ahead of the adoption curve and pushed prices well above intrinsic value. In fact, Embark went public with a valuation of $5.2 billion versus what is currently trailing 12 months of zero income. This compares to cash consumption from operations of $22 million at the end of the last reported fiscal 2022 second quarter. The company’s balance sheet is in better shape with cash equivalents of $221 million and practically no long-term debt. Thus, in the context of stocks that, from first glance, question whether the company can remain a going concern, the balance sheet provides a more nuanced view. It should be able to support a track that extends to the 2024 calendar if managed properly.
Morgan Stanley has come out to say that the industry could be looking at 2032 at the earliest before it can realize the full potential of its stated mission. Not surprisingly, Ford (F) booked a $2.7 billion impairment charge to close out its large investment in Argo AI autonomous vehicles. This was a company that was valued at $7.5 billion just two years ago and was once scheduled to go public with a valuation above $12 billion.
The difficulty for Embark will be establishing a foothold against the slew of competing offerings, not only from the plethora of other self-driving startups, but also from established automakers and tech companies. While not everyone is in the autonomous transportation business and pursuing different use cases, from robotaxis to warehouse automation, the future is clear. The best self-directed talent will flow into the seemingly advanced companies, creating laggards and industry leaders. The latter are likely to be able to apply their talent and technology to the different use cases.
Driverless cars aren’t coming anytime soon
The benefits of autonomous driving software for heavy-duty trucking companies would be significant, ranging from better fuel efficiency, reduced delivery time, and a contraction in variable labor costs. It would also incorporate increased safety throughout the road network and lead to fewer accidents and deaths per mile travelled.
But too many companies like Embark have entered the public space and are now ready to operate under brutally Darwinian conditions. Embark’s liquidity position provides a buffer against this. However, this will not prevent the company’s common shares from falling further. The company, after its 1-for-20 reverse stock split, was trading above $16, but has since fallen to around $6.50 a share.
The future of the industry is unclear and the sheer volume of competing offerings evokes the long list of defunct automakers in the first half of the 20th century. This saw a flurry of competing efforts to capture what was clearly to be the future of transportation. Today’s autonomous businesses are reflecting this era with cash-intensive R&D work that will become a continual drain on cash as revenue opportunities remain beyond the horizon. Embarking remains difficult to avoid with your destiny like the metaverse likely to be shrouded in mystery, capital destruction and cash burning.