Drone Delivery Canada Aims to Ramp Up Commercial Revenue

Drone Delivery Canada, (“DDC“) (TSX-V: FLT) / (OTCQX: TAKOF) has reported a series of good news this year, but nothing overly exciting. At least that’s what the share price has signaled. However, this latest news has some meat on the bone. I’m guessing that management heard shareholder questions about when revenue generation would commence and how much is possible, how soon. I’ve wanted to know this as well, but I was always pleased with management’s prudent approach of safety first, and keep the regulators happy! This is a Company with C$26M in cash and zero debt. They are executing well operationally, now show us the money!

From the press release,

As Drone Delivery Canada Corp. moves to commercial operations & revenue generation in 2019 in remote Canada & rural Canadian communities, the Company will also be immediately pursuing 8 additional business verticals where the Company sees great growth opportunities. The new verticals include health care, oil & gas, mining, pharmaceuticals, agriculture, forestry, construction & courier companies.

So, in a sense, DDC is now targeting every other drone company’s business models! Of course, some of these verticals will probably not amount to much, but some could become valuable segments. We will have to wait and see. However, two things I’m confident in are 1) the Company has a strong management, Board & team of Advisors in place, and 2) it is well capitalized. Presumably the C$26M in cash is not there just for show, management will be investing it into revenue generating opportunities, of which there are many. Fidelity owns 15% of the Company, institutions are jumping on board while the share price languishes between C$1.00 & C$1.20. Canaccord has a new 30-page report out this week with a price target of C$2.00. {the shares are currently at C$1.08}

DDC released a promotional video that focuses on its commercialization efforts and highlights the need & opportunity in key areas that it is targeting. The promotional video is well done, it has over 600 views (in less than 24 hours). In it management reiterated a goal of getting 200 (20%) of the 1,000 remote communities in Canada as users of their drone services in the next 5 years. Recall that a single community has signed on for C$2.5M/yr. So, that implies hundreds of millions in revenue. In my opinion only, with the Company’s existing & new verticals, revenue could potentially reach an annual run-rate of C$100M in 3 years, by 2022.

This year is the transition year to commercial revenue, but it will take a few years to really ramp up. At some point, hopefully not too far off, the remote communities segment could takeoff. When DDC gets the logistics worked out, they could be signing on multiple communities per month. Two important things to note here, the margins will continually grow with economies of scale and lower drone procurement & operating costs. And, these remote communities will likely be using DDC’s services for decades, not just a few years. Finally, first mover advantage will be huge. Tim Strauss, VP of Cargo for Air Canada says in the video that DDC is 2,3 or 4 years ahead of the global competition, even if they are just 1 year ahead, that’s extremely important.

The promotional video is a 6-minute film with 3 interviews of Michael Zahra, Senior VP of Operations & Strategy, Tim Strauss, VP of Air Canada Cargo, who sits on the Advisory Board, along with Deepak Chopra, former CEO of Canada Post, also a member of Drone Delivery Canada’s Advisory Board. They do a good job of conveying to viewers that, yes commercialization is here, but also that new revenue streams could pop up at any time. For example, DDC can now license its technology all over the world. That could start as soon as this year. Depending on the location, revenue numbers could be significant.

From the video,

The opportunities in front of us are not only with the many Canadian first nations and Inuit remote communities, but also with a broad range of government, commercial & industrial applications globally. We are also seeing an increase in traction with our international customers globally as our drone delivery system continues to be validated. Our proven system is seen as a commercially viable delivery infrastructure solution to companies looking to reduce costs and dramatically improve logistics,” commented Mr. Zahra.

I’ve been writing about Drone Delivery Canada for about 20 months. Early on, I hesitated to compare it to cannabis stocks for fear that weed stocks would be a flash in the pan, a wipeout. Well, cannabis is here to stay and so is Drone Delivery Canada! So, I will now make a comparison that I’ve been waiting nearly 2 years to make.

Cannabis investors don’t fret over pesky little details like revenue. I track roughly 250 names, about half have no revenue at all. Looking at the top 20 companies by market cap, the average Enterprise Value [market cap + debt – cash] to trailing 12-month revenue [EV/Rev] is > 100 times! If DDC could generate C$10M in revenue in 2020, it would be trading at below a 20x forward revenue multiple. I’m guessing that the top 20 cannabis players will be trading at closer to an average of 30x – 50x trailing revenue next year.

So, at under 20x 2020 revenue, assuming C$10M, DDC would be attractively priced. But, the range of revenue that DDC might generate next year probably spans C$5M to C$20 M. So, DDC could be trading at under 10x 2020 revenue. However, whether it’s 10x or 20x or 40x, it hardly matters. The real story is 2022 and beyond. Strong revenue growth for DDC, could easily outlast most cannabis companies, where competition is already very high and growing. Perhaps more important, many cannabis companies are well into revenue and are still not profitable. The product cannabis companies sell, and the costs to produce it, are both moving in the wrong direction– margins will contract.

By contrast, DDC’s services will likely experience expanding margins. As mentioned, drone procurement & operating costs are coming down with no end in sight. Thousands of research groups & companies are constantly improving drone technologies. As DDC’s drones develop additional capabilities, the Company will be able to charge more for its services. Arguably then, DDC has a much better and longer-lasting business model than most cannabis companies. Therefore, should it trade at an even higher revenue multiple? I don’t know, but I’m not overly concerned with the speed of commercialization as long as it continues to appear (to me at least) to be on track for an annual run-rate of C$100M in 2022.

But, just because I compare Drone Delivery Canada (TSX-V: FLT) / (OTCQX: TAKOF) to cannabis companies doesn’t mean it’s a fair and accurate comparison. Still, I truly believe it’s a perfectly reasonable exercise. Cannabis consumption will be a global phenomenon for decades to come. So will drone delivery services. There will be winners & losers in both sectors. But, there are far, far fewer companies anything like DDC than there are cannabis companies like Canopy Growth, Tilray, Aurora Cannabis, Curaleaf, Cronos, MedMen Enerprises, HEXO, Aphria, etc. In my opinion, that makes DDC a much more desirable and likely takeout candidate than any given cannabis company.

Drone delivery services can and will be utilized virtually anywhere in the world, especially as drone capabilities improve by leaps & bounds. Cannabis can’t be legally grown in most parts of the world, including many parts of the U.S. Competition in Canada among the many dozens of cannabis companies focused on domestic sales is fierce, and will get worse. Drone delivery services need not suffer such dramatic competition, the costs are already low for the value added to the customer and market penetration is close to zero. There’s nowhere to go but up.

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At the time this article was posted, Peter Epstein owned shares in Drone Delivery Canada and the Company was a former, (but not current), advertiser on [ER]. Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.