Today’s article dives back into some more analysis on ALPP, specifically how to value and assess Vayu and the drone program. I’m going to lump in Vayu and Impossible Aerospace together obviously, but then also include Identified Technologies here as well as they’re so interconnected. So from now on, Vayu = those three businesses.
My article will first go through how I think about a Driver type company in terms of value and performance. Then we can get into cold hard numbers to try and ballpark how wise the acquisition price was, including ongoing investment, and where we shake out there.
Background
Let’s all recall that Drivers in the ALPP world are essentially high-risk, high-reward startups that require several years of investment and effort before revenue and profits take off, if ever. The entire strategy is that ALPP’s Stabilizers will cover the cost of development of these companies through free cash flow until they are on their feet.
Vayu is the first Driver, and also the perfect example, in the ALPP portfolio. Vayu is ALPP’s drone program which is navigating into relatively uncharted waters to become one of the world’s premier drone companies for non-military (correct me if I’m wrong) purposes. Think transporting supplies to difficult areas, mapping terrain, etc.
Vayu – Patience!
This is my little rant period here so humor me if you please. But people, you need to have patience with Drivers and Vayu! These are not plug and play companies like RCA, Alt Labs, etc. These are companies that have high growth expectations and need time to really make their mark (if they ever do).
Vayu (remember we’re talking about the three businesses here) cost about 16.4m in stock payments. The whole point of building a startup stage group of companies like Vayu is that it’s less expensive than a more mature, further along option. The play here is that you buy in earlier and cheap, take way more risk, but your reward profile can be HUGE.
So first, hearing people clamoring for drone performance, news, WHERE ARE THE PROFITS?!?!?!11!1, drive me absolutely nuts! Do you people not understand the concept of a Driver or how it works? It’s right there in the filings.
Second, these things are guaranteed to turn into the next Boeing 787 or whatever. It’s risky. This is how this works. You make a risk adjusted investment based on a probability of success and future profit potential. If it doesn’t work out, it wasn’t in the cards, try again next time. But if it does work, pop the champaign bottles! It’s all about playing your hand as best you can and, if management knows what they’re doing (up to you 😊), the law of averages will say that over the long-term the strategy will pay off.
So let’s get two things clear here: 1. Drivers take years to fully develop; 2. Drivers are not guaranteed profit machines, but they’re also not guaranteed duds.
Valuing the Aerospace Business
As with my article on RCA, I think a DCF analysis is the most straightforward and relatively simple way to go about ball-parking an acquisition price. Let’s run through my assumptions:
- Initial Outflow (2021) – I have 16.4m in equity compensation for the businesses, plus 1.5m in acquisition costs, plus 1.3m in estimated loss in the Aerospace division for 2021.
- Discount Rate – these are highly risky ventures. I gave RCA a discount rate of 17.50%, so as a Driver, I would expect a required rate of return of 40%.
- Revenue – This will go grow rapidly, assuming it works, at more than 100% for the first several years. Then it matures slightly into a declining 50%, 40%, 30%, etc. growth year over year.
- Profitability – see the chart below, but this will not be profitable, in my opinion, for about 4 years. But hopefully that’s sooner 😊. Margins, when profitable, should be high… around 20% is pretty standard for a tech company. And that’s net of tax.
- Term – as with most things non-medical related, I like to project over 10 years. If you can’t make up your investment (discounted) over 10 years, it’s not worth it.
- Non-cash items – that’s a broad assumption. Most of that will be stock comp/amortization in early years, and in later years it’ll be mostly depreciation of manufacturing facilities, etc. I tapered off the increase in the later years. But the business will be pretty asset heavy (assuming in-house production), so I expect high depreciation and still some high stock comp.
These are obviously speculative, but we’re trying to get in the ballpark here. But hopefully this gives you a sense for how we want to think about Drivers and any future Drivers ALPP acquires.
The DCF Model
Without further ado, I’ve pasted the results below in a desktop friendly format and a mobile friendly summary!
Interpreting the Model and My Take
As you’ll see, using my assumptions, we’ve exceeded the required rate of return and now have a positive NPV. In general, I think I was pretty conservative by using a very high discount rate of 40%. So, even though the revenue growth and profitability seem high, the discount rate is huge which accounts for the inherent risk involved.
Also, remember this is very speculative. So if you start tweaking my numbers, you could very well end up at a negative NPV, which means you did not exceed your required rate of return. So it’s clear that ALPP didn’t find the bargain of the century here, per se, because my NPV still comes out to a number relatively close to zero.
But all in all, I thought they did a pretty good job with these acquisitions given the high potential returns involved. They got their feet wet into the business and have high expectations for the company. This wasn’t exactly the most expensive purchase of all time, and it was incredibly risky. So if this pays off, you’re going to be high fiving each other and wondering why you didn’t buy more!
On the other hand, if it never really takes off, just remember that this wasn’t some all-in, do or die, investment. It was a calculated risk that, over time, will pay off as ALPP continues to work their business model.
I would very concerned if I ran this analysis and was getting super negative NPVs, but I wasn’t. To me, the initial outlay and years of negative profit could be worth it even at a risk level constituting a 40% discount rate. So all in all, not too shabby!
Thanks for listening to my rambles! If you’d like to support me on Patreon, I’ve provided a link here: https://www.patreon.com/SamAkerFinance
DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I DO NOT HAVE A FINANCIAL INTEREST, LONG OR SHORT, IN $ALPP. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. AT THE TIME OF WRITING THIS ARTICLE, PERSONS AFFILIATED WITH THE COMPANY ANALYZED ABOVE MAY BE PROVIDING MONETARY COMPENSATION AS MONTHLY PATRONS THROUGH MY PATREON. THIS COMPENSATION IS NOT PROVIDED IN RETURN FOR ANY SERVICE, WRITING ABOUT A PARTICULAR TOPIC, AND/OR FAVORABLE OR UNFAVORABLE OPINIONS. MY PATREON SUPPORTERS HAVE NO INFLUENCE ON THE CONTENT OF MY ARTICLES.
