Eve Holding Stock: A Very High Risk Bet on Urban Air Mobility (NYSE:EVEX)

In October, we covered Eve Holding (NYSE:EVEX) with a buy rating. Since then, the share price has performed horribly, with the share price down more than 60%. To me, this continues to show the risks along the commercialization path of urban air mobility solutions. In this report, I will discuss the latest results with a focus on risk and liquidity.

The risks and opportunities of urban air mobility

One risk I see with covering UAM or eVTOL names is that disruptive technology is often equated with value creation. This is not necessarily the case.

In an earlier report, one of the salient points of the article was as follows:

eVTOL development is in its early stages and it is likely that many of the eVTOL models will not enter the market and create sustained success.

That the observation will apply for the foreseeable future. In some ways, urban air mobility as it stands today is not much different from biotechnology or disruptive technology applied to the commercialization of space. There is a disruptive technology that needs to be thoroughly tested, and UAM solution providers need to develop their product, test and then scale up production. With many active UAM players, there is no doubt that some will not be able to deliver on their prospects and may run out of liquidity even before the product is launched.

As more urban air mobility solutions move towards a commercialization path, I believe the risk of shareholder dilution also increases. eVTOLs probably need to be produced in large quantities to make production profitable and that requires selection of the right suppliers as well as the infrastructure to scale up production significantly. Eve has an advantage over many other urban air mobility developers because it can take advantage of Embraer’s knowledge and resources.

However, even before this commercialization phase, the risk of prolonged development and certification timelines remains, which could add financial pressure to the business.

Eve launches its eVTOL

In July, Eve launched its first prototype, marking the completion of its prototype aircraft assembly. The company also continued to select additional suppliers for the fuselage, power distribution systems, doors, interior and windows. Thus, the selection of primary component suppliers has been completed. So there is definitely progress in development.

The prototype does not include a cockpit, and after ground tests, the company will conduct flight and flight tests later this year, with the prototype being remotely controlled.

Eve raises additional capital

What we’ve been hearing for a very long time is that the company believes it has enough cash available to fund its operations through 2025. So it may have come as a surprise that the company raised $94 million in capital, which diluted shareholders by approximately 7% and an additional $1.6 million was raised through an additional equity raise that issued 0.4 million shares. The private placements were dilutive in nature, but as part of the deal there was a cancellation of warrants that would have allowed for the purchase of 8.3 million common shares. This has now been replaced by the issue of 3.3 million ordinary shares.

Q2 2024 pro forma liquidity was $340 million and to me that raises some questions. For 2024, a cash burn of about $130 million to $170 million is expected, with the expectation being closer to the lower end of the range. If we assume a cash burn of $140 million for 2024 and factor in free cash flow of $67.3 million in the first half of the year, then we arrive at a year-end balance of $267 .3 million dollars. In 2025, cash burn is expected to intensify as five prototypes are built and production investment accelerates. So I would expect the free cash flow burn to be significantly higher. Assuming it is 50% higher than the expected lower bound of the 2024 cash flow burn, we would see a use of free cash flow of approximately $195 million in 2025, which would bring the balance at the end of 2025 to $72.3 million. What this would basically indicate is that the $95.6 million capital increase was a necessity and not so much adding liquidity to a safe buffer. Also, looking into 2026, I don’t think that will be the tipping point for Eve’s cash burn.

Looking at liquidity, I don’t think the buffer is as big as one would think when looking at management’s comments, and I also think that further increases in liquidity are likely in the future and the only offset would be capital raising by issuing debt. or referral payments start flowing. Eve expects the conversion of part of the $14.5 billion pipeline to start turning into firm orders in the next 12 months, which should provide some additional cash inflows. However, I think the risk of dilution remains. There are also 11.5 million warrants expiring in May 2027. These warrants can be redeemed if Eve’s stock price is above $18 for an extended period, which is currently not the case. Public Warrants are exercisable at a price of $11.50. So the only tangible way for this to be truly dilutive is if the stock price goes back to at least $11.50, in which case it makes sense for the warrant holders to exercise, and at that point I also think that prices higher shares reflect successful trading. In addition, the company has a new warrant outstanding that would convert into 37.4 million shares of common stock if 14.3 million private placement warrants were also exercised.

In theory, exercising all the warrants would raise about $530 million while diluting existing shareholders by 18%, which is a better equity raise than the company agreed to in the second quarter, but exercising those mandates only make sense if there are certain clues. that Eve is on the right track and timing for commercialization.

Is Eve Holding Stock a good buy?

If you are considering buying shares in Eve Holding, I think you should be very aware of the capital requirements and the risk of dilution. The tangible value per share is currently $0.39. The median price-to-book value for Eve is 10.33x, which would give a price target of $4.03, which offers a 43.3% upside to current prices, which exceeds possible dilution. So, I would mark the stock as a speculative buy.

Conclusion: Eve Holding is a high-risk speculative buy

My view on Eve has remained unchanged and is that there is a highly speculative buying opportunity with significant dilution risk. This shouldn’t necessarily scare off investors, but Eve is a company you’d want to invest in incrementally for a speculative bet on its success in urban air mobility. The big question is how much shareholder dilution will be done before the company begins profitable production on its urban air mobility vehicles. That’s an answer no one knows, but that merchandising timeline will dictate whether a speculative purchase ultimately pays off or not. I continue to mark the stock as a buy, a highly speculative one, with the note that the company’s liquidity has been less strong than initially expected, and I find a service inflow through 2026 extremely bullish. Perhaps the only reasons I’m marking this as a buy rather than a hold are the reduced booking price and the partnership with Embraer ( ERJ ), which should benefit Eve’s path to market.