Drone Delivery Canada’s stock takes flight, will it keep flying higher?

Will Drone Delivery Canada Corp. [“DDC“] (TSX: FLT) / (QTCQX: TAKOF) shares continue to rise? I have no idea, but the prospects for this Company have never been better.

On January 28th the Company provided an update on its plans to integrate artificial intelligence (“AI“) into its drone delivery logistics solution. While this is very good news, it’s no surprise.

As has been contemplated for some time, management plans to integrate select aspects of AI onto its platform. An example is the use of AI to monetize tremendous amounts of valuable operational data collected over time, relating to “weather, air traffic / package delivery patterns; radar data; vehicular & marine traffic data, and battery/fuel consumption data.” — Jan. 28 press release

President & CEO Michael Zahra commented,

There are numerous applications for AI within our ecosystem to bring even greater benefits to our customers…. considering the high volume of proprietary data obtained through our operations — this data can be monetized to create incremental revenue streams.”This is really interesting, the margin on this revenue could be 80%-90%+!

In the years I’ve been following DDC, meaningful commercial revenue has always been ‘next year’….. Well, ‘next year’ has arrived, but 2021 revenue will not be that exciting. I’m estimating $12M (range of $9M-$15M among analysts).

Expert technology group Ark Invest forecasts that (drone delivery revenue alone) will be a US$275 billion/yr. in nine years (2030). As an emerging leader in drone flight system software, now in year seven of developing its unique technology platform, I believe DDC could capture a modest but meaningful portion of that giant market.

Even if DDC could achieve a half percent (0.5% = 0.005) of a $275B market, that would be $1.375B in 2030 revenue. Therefore, if DDC remains a standalone company in 2030, it could be worth ~$2 billion (1.5x sales).

In my opinion, it’s far more likely that the Company will be acquired long before then. {see indicative comparable companies below, EV = Enterprise Value = market cap + debt – cash}. Look no further than Ehang Holdings ($7.5 billion market cap) to see what DDC could become, or a company that might benefit from acquiring DDC.

Like DDC, Ehang finds itself in a

I mention a 1.5x Rev multiple because that’s the average in the first chart, but if DDC is reasonably successful, it will enjoy the superior margins of a tech/software company and command much higher EV/EBITDA & EV/Rev ratios. Please see second chart.

If, over time, DDC can win long-term contacts, achieve strong revenue growth & increasing margins (due to economies of scale & improving drone capabilities) — it should be rewarded by the market.

Note: AeroVironment supplies unmanned aircraft systems (UAS) and related services, primarily to organizations within the U.S. Dept. of Defense.

I believe the tipping point for drone delivery logistics & Electric Vehicles (in North America) could come around the same time — 2023 or 2024. EVs in major cities of China, and in several countries of Europe, have already tipped.

For EVs, almost everyone would agree that a tipping point is coming. On the other hand, the idea of widespread routine use of drone delivery in populated areas, is a different story. However, it really is just a matter of time, and it will happen this decade in many countries.

If drone delivery was 1) safe, 2) fast, 3) inexpensive, and 4) environmentally-friendly, it would be ubiquitous for a lot of products & services. Where are we today on those four critical metrics?

SAFETY

Safety is getting better by the day. The vast majority of accidents & near-misses are attributable to amateurs. A number of mitigation steps, such as deploying parachutes on distressed drones, will become commonplace. Human error in crashing delivery vans is a much bigger problem than the occasional falling drone!

I don’t mean to make light of safety… Seriously, DDC employs trained professionals, with access to redundant, state-of-the-art technologies, following strict safety guidelines. Regulators in the U.S. & Canada have been working very hard with leaders like DDC on industry-wide drone safety protocols for over a decade. DDC has been at it since 2014.

S-P-E-E-D >>>

Depending on payload & flight path, DDC delivery drones can fly at ~80-120 km/hr. Every improvement in drone hardware enables the potential for higher speeds. Even at today’s speeds drones easily beat dispatching a delivery vehicle from home to home. Drones fly in straight lines, with zero stop signs, traffic lights or traffic jams.

COST

The cost of providing drone deliveries has the most room for improvement. Economies of scale will play a big role. Deliveries on select flight routes could increase from a few per day, to dozens per day, to hundreds per day (+night).

Drone hardware companies will be mass producing delivery-focused drones, which will lower costs of acquiring drone fleets. Rechargeable batteries are becoming more powerful, longer-lasting & lighter, with no end in sight.

An extraordinary amount of research is going into rechargeable batteries for EVs. That knowledge will transfer over to better batteries for drones.

Lower & lower operating cost over time + modest upfront cap-ex (buying the drones), will enable retailers and others to offer very low cost and eventually free drone delivery service. It will be a cost of doing business for retailers, and a high-margin, rapidly growing business for DDC.

Environmentally Friendly

There are several factors to consider with regard to the environmental friendliness of delivery drones. Every new drone design demands lighter, stronger (greater payloads), faster drones, with increased range.

All these factors reduce pollution. More important, one needs to compare delivery alternatives. As the volume of low-cost, safe, reliable, fast, efficient drone deliveries increase, no one will not miss delivery vans & traffic jams.

A tremendous amount of de-risking has occurred over seven years. DDC has accomplished goals and built relationships that would take a long time to replicate by a new competitor.

When companies like Amazon are finding it extremely difficult to succeed in this new field — it’s clear there will be dozens of companies eager to acquire DDC. Companies like Amazon, Alphabet / Google, Apple, Intel, Microsoft, etc. could afford to pay $1 billion, a mere drop in the bucket for them (They have market caps > $1 trillion).

About four years ago, when I started writing about DDC, the CEO at the time told me that his company had no competition. I didn’t believe him. Even if true, I reasoned, competition would be right around the corner. Fast forward to today, STILL NO MEANINGFUL COMPETITION on the drone delivery logistics (software) front.

I have grown to understand the drone opportunity for DDC in a new light. Yes, there will be giants who throw huge sums of money at the drone delivery challenge and get it to work, but those companies will only be serving their own customers. That’s not a business threat to DDC, it’s merely a single large customer they will not get.

The most likely endgame is that a $10B+ retailer, tech, or logistics company starts down the road of drone delivery, finds it will take 3+ years to get where they want to be, and acquires DDC instead. Again, I think there are dozens of companies that fall into this category.

If I had to guess, a takeout could easily happen as soon as next year. Readers should consider taking a closer look at this drone logistics company. Drone Delivery Canada Corp. (TSX: FLT) / (QTCQX: TAKOF) is a force to be reckoned with.

Disclosures / Disclaimers: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Drone Delivery Canada, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Drone Delivery Canada are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Drone Delivery Canada was an advertiser on [ER] and Peter Epstein owned stock options in the Company.

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