What happened
Shares of Aurora Innovation (AUR +2.59%) are soaring this week. The self-driving vehicle technology expert saw stock prices rise 43.1% between the closing bells last Friday and this Thursday, according to data from S&P Global Market Intelligence. The jump was powered by a single analyst report of the ultra-bullish variety.
So what
That report came from Canaccord Genuity analyst George Gianarikas, who started coverage of this stock with a buy rating and a one-year target price of $5 per share. That's more than three times Aurora's stock price on Tuesday, before this market-moving document was posted on Wednesday morning.
In particular, the analyst likes the young company's experienced management team and robust growth prospects in the barely born American market for self-diving cargo trucks. Self-driving passenger car services also added value to the analysis, but that crowded space was given a far lighter weight than the trucking opportunity.
NASDAQ: AUR
Key Data Points
Now what
Canaccord's target price was calculated from very optimistic free-cash-flow estimates, using a discounted-cash-flow (DCF) analysis with uncommonly bullish assumptions such as a 5% terminal growth rate. This crucial cog in the DCF machinery usually sits somewhere between historical inflation trends (roughly 2%) and the average growth rate of the country's gross domestic product (roughly 3%).
It should also be noted that DCF calculations only make sense when you have positive cash flows or earnings to work with. In Aurora's case, every profitability metric is currently deeply negative over the last four quarters. In other words, the Canaccord team assumed that cash flows will turn positive very soon and then grow at a skyrocketing pace forever, for all intents and purposes.
The target market is indeed massive and enticing, and a firmly established leader of autonomous truck-driving tools should make a mint in the long run. Early trials seem promising, and the company is working with A-list trucking clients such as FedEx and PACCAR. But Aurora Innovation is not the only name in the game, and the company has work to do before cashing in those long-term promises.
I find Mr. Gianarikas' assumptions a bit hard to swallow, especially since the analyst also noted that the company needs to raise more cash through stock sales or debt papers before reaching the land of soaring cash profits. Aurora is still going through a testing phase, aiming to launch revenue-generating products by the end of 2023.
While the siren call of a disruptive technology like autonomous vehicles is undeniable, the market's rip-roaring reaction to this excessively bullish analyst report feels like an overenthusiastic leap of faith. Investors would do well to exercise caution and dig deeper into Aurora's prospects before jumping on the bandwagon.
