Pony AI IPO – A Question of Time

Timing of autonomous driving remains very uncertain.

• Pony AI has gone public on the back of revenues generated from engineering, but real growth will come from ride-sharing fares and when these will take off is much more uncertain making a valuation over 43x revenues look pretty risky.
• Pony AI is a company that I have known for quite some time and RFM Research has consistently listed it as one of the leaders in autonomous driving.
• Pony AI has pretty much the same business model as Waymo in that it has a solution for autonomous driving which it makes available to car and truck makers or fleet operators who want to offer a robotaxi or robotruck service of their own.
• Pony AI also offers the software, infrastructure and the app to match riders to drivers which customers can also take to have a fully integrated service should they so desire.
• The company has just gone public at $13 per share raising $260m from 20m new shares issued giving a total diluted share count of 348.96m and a market capitalisation of $4.5bn.
• This would not be unreasonable for a company that could promise very rapid growth for a number of years, but I do not think that this is the case here for two reasons.
  • First, Non-recurring engineering revenues (NRE): which make up almost all of the revenues the company is currently earning.
  • These are revenues paid to Pony AI by customers in return for integrating its technology into their vehicles and, as such, are one-time in nature.
  • Hence, when all the integrations are done, this revenue stream will trend towards zero with the idea being that revenues from autonomous ride-hailing and robotrucking will replace it.
  • NRE revenues are also very lumpy as can be seen in the prospectus where revenues for the first nine months of 2023 were $21.3m which is just 31% of the total revenues that the company recorded for the full year 2023 ($71.9m).
  • Furthermore, 2023 saw just 5% revenue growth YoY clearly demonstrating that, in this case, NRE is not a growth business.
  • For the first 9 months of 2024, the company has recorded revenues of $39.5m but given the lumpiness of NRE, it is impossible to know what Q4 24 will bring.
  • Hence, this company and this valuation do not stand on the business as it is today but rely in their entirety on the take-off of autonomous driving (see below)
  • Second, Autonomous driving: where mass market take-off is extremely uncertain.
  • The problem remains that machine vision is still not good enough to enable a computer to drive a car or a truck more safely than a human can.
  • Until that milestone has been passed, the autonomous driving market is going to remain small with revenues being generated from pilots, small-scale operations and NRE.
  • Once the milestone has been passed, Pony AI is in an excellent position to collect a small portion of every fare which will allow it to grow extremely fast with pretty healthy profitability as long as it refrains from owning the fleets themselves.
  • In 2017, I proposed a target of 2028 for when autonomous driving would become commercially viable which, at the time, was by far the most pessimistic forecast in the market.
  • Fast forward to today and my 2028 forecast is by far the most optimistic in the market and I may even be forced to push it back.
  • Hence, I don’t think that real commercial autonomous operations will commence at scale anytime soon, leaving me wondering where Pony AI will get the 2025, 2026, 2027 and at least 2028 high growth it needs to sustain the valuation.
• I continue to think that Pony AI has a leading autonomous driving solution and that when the market takes off both in China and overseas, it is in an excellent position to benefit.
• However, when this occurs is very uncertain and as a public company, any delays are going to be self-evident in its financial statements.
• Furthermore, any wobbles will be harshly punished given how high the multiple being applied to revenue already is.
• The company is also not without other risk as it is a Chinese company meaning that the foreign investors are investing through the VIE structure as well as being exposed to the now well-established risks of doing business in China.
• The company is also controlled by a single founder meaning that minority investors have no say in how the company is run nor can they remove management.
• I think this could easily go a lot lower as delays are priced in and so I am happy to wait on the sidelines until the market offers me an opportunity to take a serious look at it.