Drone Delivery Canada Corp. Is As Speculative As The Industry Peers
Summary
- Drone businesses have seen their valuations multiply recently, reaching all-time highs in February 2021, before coming down somewhat over the course of March.
- Drone Delivery Canada Corp. was one company with a run-up in share prices. Two of the industry peers, Draganfly and Alpine 4 Technologies, had a simultaneous surge.
- Drone Delivery Canada Corp. has virtually no revenue yet and the services are still in testing. There's no financial basis for a multiplying share price. It's a purely speculative run-up.
- Investors should be cautious with investing in Drone Delivery Canada Corp., just as with the peers. The company will run out of cash soon and new funding will be needed.
Drone Businesses: Very Necessary, Hard To Scale
Let me start out by stating that I'm a believer in drone businesses. Drones have already successfully been applied for military purposes, in policing, in the inspections of industrial plants, in the delivery of medicine or packets, in spraying of liquids or anti-infectants and countless other situations. Drones can thus be used to deliver valuable and necessary services. A quick scan of online available estimates for market size and growth rates of the drone industry reveals a very positive outlook for drones. Growth rate estimates are generally double-digit for the coming years and the market size potential for drone services is generally estimated to be in the 10s of billions of annual revenue.
This emphasis on my enthusiasm for drone businesses comes first, because I've recently written two bearish articles about two drone companies, which may give the impression of the opposite. My bearish conclusion about those two companies, however, doesn't have anything to do with the use of drones or the viability of drone companies. It was the insane market capitalization that the market had assigned to them. The market seems to have unrealistic expectations about the growth potential of some drone companies.
Specialized drone companies are often still in an infancy phase with very limited revenue and immature services. The companies that are discussed in this article are very small in terms of revenue and have uncertain prospects. The products and services that they deliver are often tailor made per client and require teams of technicians for the development, installation and maintenance. Each client has specific requirements that need separate solutions and separate manpower.
Drone services are far from "one-size-fits-all" and therefore hard to scale. This poses a challenge for drone companies and puts a cap on how fast the businesses can be expected to grow. Valuations based on high growth expectations can turn out to be unrealistic and may lead to significant losses for investors who buy high.
In light of that, my thesis for Drone Delivery Canada Corp. (OTCQX:TAKOF), DDC for short, is that the valuation of this innovative company has gone up too much, similar as with some peers, considering the current state of affairs and the uncertainties ahead.
Recalibration of Drone Delivery Canada Corp., Draganfly and Alpine 4 Technologies
The shares of Drone Delivery Canada Corp. surged to all-time highs of over $1.80 around mid-February 2021. From that high point, as the below graph shows, the price fell back considerably to $1.15, at the time of writing of this article, at the end of March 2021.
The run-up to the all-time highs, when share prices reached triple the price of a recent low of just over $0.50 at the end of November 2020, was not a standalone event. Two of DDC's peers, Draganfly (OTCQB:DFLYF) and Alpine 4 Technologies (OTCQB:ALPP), saw a run-up over the same period too. They also have dropped back considerably since their February 2020 highs. In my opinion, this simultaneous movement in share prices of drone companies is connected.
It shows that the market has been recalibrating drone stocks in general. In the run-up period from December 2020 to February 2021, unrealistic expectations have pushed several drone shares up too much. Since the consecutive drop from the February highs, the valuations have simultaneously been dropping back to more realistic levels.
The graph of the Draganfly share price below shows the run-up from December to last February and the decline after that.
And the next graph below shows the same pattern for the Alpine 4 Technologies share prices with the high point again in February and the drop right after.
Some readers or analysts may disagree that the simultaneous run-up and decline of shares of the three drone companies discussed here are connected. Some readers on Seeking Alpha have commented with previous articles that they think that the share price movements of Draganfly and Alpine 4 Technologies are unrelated. I think it's very unlikely that the simultaneous movements are a coincidence. The market considers Drone Delivery Canada Corp., Draganfly and Alpine 4 Technologies to be part of a family of drone companies. It is simultaneously driving up or down the share prices of all three companies.
One separate remark is that Drone Delivery Canada Corp. and Draganfly are both purely focused on drones, while Alpine 4 Technologies has other lines of business as well. I'd argue, however, that the price surge of Alpine 4 Technologies shares is mainly driven by the recent acquisitions of two drone companies. I refer to my article about Alpine 4 Technologies for more background about this.
Drone Delivery Canada Corp. Capabilities and Go-To-Market
The key opportunity that Drone Delivery Canada Corp. is after is the market for drone delivery in Canada and the US. Over the last three years, the company has been working hard on building the capabilities and the go-to-market. A comprehensive management discussion of key achievements in the last three years to prepare for a commercial market entry is available online. Many of the achievements are about new drone capabilities or about new agreements with prospects to start using the drone services once they've been made commercially available.
The focus on developing the capabilities is illustrated by all the tests that the company has been conducting of drone solutions to deliver over long distances, in hard to reach rural areas for example, and with relatively high packet weights. The red thread is that the capabilities are becoming increasingly more accurate, cover ever longer distances and are able to deal with increasing higher weights.
While developing the capabilities, the company is also continuously preparing for a market entry by signing Letter-of-Intents (LOIs) with domestic and foreign prospects. There are many commercial and governmental organizations that are interested in making use of the drone capabilities and that are willing to express the intent to do so by signing an LOI.
It is important to note that the company is still in preparation mode. There's hardly any revenue coming in yet. However, the current company capabilities and go-to-market plans are painting a very positive picture for the future. The commercial launch of drone services is to be expected in the near future. The recent announcement of DDC that the sales and marketing function is being expanded is proof of that.
Market Caps and Financial Outlook
The recent volatility in share prices of drone companies is a logical result of the market putting a price on businesses that have only little revenue now, but have a chance of financial success in years to come. The potential return is far out in the future and current share prices can change a lot in short periods to reflect any changes in that longer term outlook. Aside from rising interest rates that have been negatively affecting many high valuation technology stocks in the last weeks, there are countless other factors that can influence the drone company share price.
Regulatory factors play a role, like the approvals to use drones outside the visual line of sight and permits for unmanned aerial vehicles in general. Competition can launch viable alternative drone solutions. Political considerations are at play, like the restrictions on the use of Chinese equipment, such as DJI drones, in the US. Technical feasibility is important, like the current technical testing of DDC of the drones. And last but not least, financial aspects are also taken into account by the market, like the available cash and funding for the drone business in the early stages, before breaking even or showing a healthy revenue growth.
The below table shows how the market, taking into account all of the above factors, is valuing the three companies at the time of writing:
Drone Delivery Canada Corp. | Draganfly | Alpine 4 Technologies | |
| Market cap | ~315 million CAD | ~$110 million | ~$380 million |
| Est. Revenue 2020 | <1 Million CAD | <$5 million | <$35 million |
Source: author compilation on the basis of company financial reporting
The table illustrates that the market is already attaching significant value to the companies with relatively small revenue. This means that the market expects the current revenue to grow significantly in the future. It is apparently not too concerned about some of the above mentioned factors that can cause delays and hurdles in growing revenue.
The above table also makes clear that DDC generates the least revenue at the moment and that the market is already assigning a substantial market cap to the company. One recent DDC filing shows that drone service revenue for the first nine months of 2020 was a mere 62,613 CAD. The operating loss over the same period was 10,877,403 CAD. The below statement contains these numbers:
Source: Financial statement Q3 2020 Drone Delivery Canada Corp.
In the same report, it becomes clear that the company had a little over CAD 12 million in cash per September 30, 2020. Assuming the company keeps adding losses at the same pace as in 2020, it means that it had just shy of one year in runway before running out of cash.
It's not so clear from the reporting and the available open sources when DDC will start to bring in serious revenues. Investors should keep in mind that there are many factors that can lead to delays in the commercial go-to-market. In my opinion, it's very likely, if not almost a certainty, that new funding is needed before the company makes enough revenue to pay the operating expenses, which are around ~CAD 13 million annually, and additional investments to optimize the services.
If the company would indeed require new funding, it could lead to dilution for current shareholders or it could lead to the company taking on debt, which would weaken the position of shareholders in the capital stack. Either way, I foresee a bumpy road for the shareholders on the way to success. In light of that, I consider the current market cap too optimistic.
Conclusion and Investor Takeaway
Drones are here to stay. There's ample evidence that drone services are viable and will at one point reach the full potential that the market is expecting. DDC has made significant progress in developing capabilities and go-to-market plans to optimize the chances of success. It has been investing millions in anticipation of future revenue. In Q4 2020 it had the cash to fund the burn rate for one more year.
Given the fact that there's currently no revenue to speak of and that building a drone business is a slow growth undertaking, it's almost unavoidable that external funding for some years will be needed. New funding will translate to pain for current shareholders. On the basis of that outlook, I have a bearish stance on DDC shares at the current price, just as on the Draganfly and Alpine 4 Technology shares. Investors can pick up shares when they drop back to well under $1, but they should be aware that it's a highly speculative investment at any price.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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