Deciphering SPACs and their implications
Will the DJI Drone IPO finally take off in 2021?
DJI Innovations is a Chinese company that produces commercial and recreational unmanned aerial vehicles (UAVs). Its product line covers the high-end UAV flight control system and ground control system, professional film and TV aerial photography platform, top commercial gimbal system, high-definition long-range digital video transmission system, professional-level wireless remote control and imaging terminal as well as intelligent model aircraft products and high-precision control module which are widely applied to flying toys.
DJI is the market leader with a 74% market share in the global drone market which is growing at 19.41% CAGR. DJI is currently offered at a valuation of 18Bn and expected to IPO in 2021 at 24 Bn USD (current discount 25%). DJI’s core business is strongly poised with an excellent value proposition to its clients – ranging from photography, agriculture, risk detection, racing to hobbyists. It has a market holding strategy of low price and high volume to keep competition at bay. However, it faces headwinds in the form of high risk from government regulations including a potential ban in the USA due to data hijacking risks. Another major risk is the development of open-source flight control platforms, which might ignite a fierce price war in the drone industry.
Notable Investors: Accel Partners and Sequoia Capital
Headquarters: Shenzhen, China
Total Funding: $155 Mn
Chief Executive Officer: Frank Wang
General Manager, SF; Director, Aerial Imaging: Eric Cheng
The Secret of Success?
- Market Share: China’s DJI possesses a 74% market share of the global consumer drone market. It was valued at $15 Bn in 2018 during its last fundraising round, ranking it among the top tech unicorns worldwide. The drone market itself is growing at an exponential CAGR of 19.4%.
- Value Proposition: DJI offers drones with a wide variety of features, and at various price points to capture as much of the consumer market as possible. They have also vertically integrated drone manufacturing and own stakes in various key component suppliers, such as a majority stake in their drone camera supplier Hasselblad. This helps keep costs lower than any other player in the industry.
- Continued R&D: In 2016, DJI internally incubated the team Livox that focuses on R&D of LiDAR sensors for high-speed self-driving and industrial robotics. As the range and image sensors are essential for drones as well, DJI has been working on similar technologies for years, thereby helping easy technology migration for the vehicle LiDAR. Besides, due to differentiated design, Livox LiDAR is tens of times cheaper than the ones manufactured by the US-based company Velodyne. DJI is known for continuous and relentless innovation and most of the competition is quite behind when it comes to drone technology.
- High Volume and Low Price Point Strategy: the firm aims for profit margins in the low single digits to ensure competitors cannot offer a similar drone at a lower price point. The fruit of the company’s early start and commitment to cost control show in their manufacturing prowess. DJI consumer-level quadcopters have been outperforming their competitors in terms of drone size, stability, image quality, and battery life since the release of its Mavic pro series in 2016.
- Strategic Partnerships: DJI has collaborated and created distribution agreements with many companies worldwide, including the Apple store since 2015 for its Phantom series and later the Mavic series making its products accessible to all consumers. These moves have improved brand awareness and allowed DJI to reach more consumers than the competition.
- Industrial integrations: DJI has enhanced its integration capabilities by partnering with industry giants for niche capabilities:
- Microsoft has integrated Azure IoT Edge and Azure Cloud with DJI drones to streamline the secure deployment of DJI drone squads. Also, DJI Manifold 2 has now been approved for Azure IoT Edge, making it easier for companies to deploy AI frameworks on computers.
- FLIR Systems has launched the MUVE C360, the first multi-gas detector completely integrated with the DJI Matrice 210 drone, which will change the way emergency response teams treat toxic, industrial, and environmental accidents by offering a new level of protection, significantly minimizing time to action.
- Future-ready product stack: DJI Drone technology helps companies and organizations around the world save time and money and increase the safety of employees in myriad industries. DJI focused on providing easy-to-use drones to farmers, agronomists, and stewards to help maintain their land in a more productive and environmentally sustainable manner, while also ensuring that emergency responders need assistance to respond effectively and save lives during natural disasters.
- P4 Multispectral drone: the world’s first fully-integrated multispectral imaging drone designed to power next-generation agriculture and allow more effective land-use environmental management.
- Agras T16 drone: The global launch of DJI’s leading spray drone for agricultural applications that makes it easy to apply liquids such as fertilizers and pesticides specifically to field crops and orchards.
- DJI Disaster Relief Program: A new initiative to rapidly equip first responders with DJI drone technology and support during natural disaster response and recovery missions for wildfires, hurricanes, floods, tornadoes, and earthquakes.
- Diverse client base: Caters to a diverse clientele in the industry from government to agri-businesses. Easily accessible to varied users such including hobbyists and professional photographers. They have expanded into racing drones for the gamers and even drones that carry people.
- The US government may blacklist DJI for potential data threats. USA is DJI’s second-largest market. With rising geopolitical tensions, the situation might get worse, endangering approx. 40% of total revenues.
- The American Drone Security Act is just around the corner, if passed it would mean that all federal agencies using Chinese drones, such as the Department of Justice and the Department of the Interior, would have 180 days to avoid using and purchase them. In other words, the police, fire departments, traffic controllers, and several others could lose their drone fleets and have to find other suppliers or give up using drones.
- Big firms such as Intel and Qualcomm are making significant investments and waiting for opportunities to replace DJI as the top drone player. Competitive intensity is likely to increase going forward, especially in niche areas.
- The development of open-source flight control platforms might ignite a fierce price war in the drone industry.
- The CEO of DJI Frank Wang predicted that the company’s revenue would hit a ceiling of USD 3 billion as it already dominates the overall drone market.
- The most problematic factor for the consumer drone market in it is the local market is evolving government regulations around the use of drones. As per Chinese regulations, only UAVs that weigh under 250 grams is not required to be filed with the local government. The current government regulation on consumer drones limits the functions of miniature drones and likely to restrict sales going forward.
- The US Army has raised security issues as it believes that DJI can capture location, audio, and even visual data from consumer flights. The US Army is worried about the widespread exposure to data hijacking as drones might end up disclosing comprehensive knowledge about military activities, given that DJI is a Chinese business.
How justified are the current valuations?
The last reported market valuation for DJI drones was $15 Bn as per the latest round of funding in April 2018. Based on current market news, DJI is likely to launch its IPO with a minimum valuation of $24 – $27 Bn. Taking EV/Revenue multiple into account and weighted average calculation of the comparable companies, we arrive at an NTM multiple of 4.77x – 6.15x which gives us an intrinsic valuation range of $9.54 Bn to $12.3 Bn.
Due to its colossal size and market share, it’s difficult to compare it with any other drone company which has a similar size or business growth potential, however, we have compared it to publically traded companies GoPro, Parrot Drones, and Plantronics.
Table: Financial performance of DJI compared to its competitors
|Projected Revenue||2000 Mn||1194 Mn||128 Mn||1762 Mn|
|Revenue Growth||60%||– 8%||– 37%||24%|
|Fund Raised||155 Mn||288.2 Mn||1.2 Bn||—|
|Net Income||—||– 67 Mn||– 170 Mn||– 71 Mn|
|Valuation||12.3 Bn||1.2 Bn||723.1 Mn||2.7 Bn|
Revenue: DJI has experienced very strong revenue growth in the past years and trends continue to remain very robust. With two product launches in the past six weeks and over 70% market share, revenues were up by 60% year-to-year growth at $2,000.6 Million and a profit margin of 26.17%.
Fraud: Back in 2018, some of the employees had been inflating the cost of parts and materials for financial gain. DJI dismissed several employees, alerted law enforcement, and immediately set-up renewed internal channels for whistleblowers to report fraud. The amount of losses from the fraud is approximately around 1 Bn Yuan i.e. $150 Mn USD.
GoPro: GoPro is an American company that is engaged in designing and providing cameras, mounts, drones, and appliances. The company outsources a part of manufacturing to third parties in China. GoPro has a global presence, including Europe, the Middle East, Africa, and Asia-Pacific, with the Americas contributing over half of the total revenue. It raised $427 Mn in its initial public offering on the NASDAQ stock exchange under the ticker symbol of GPRO in 2014.
Parrot Drones: Parrot is a European leader based in Paris that creates, develops, and markets consumer technology products for smartphones and tablets worldwide. It offers consumer drones, including mini, AR, and bebop drones; commercial drones; handsfree kits, plug and plays, and infotainment products; Bluetooth, digital music, and infotainment solutions; and audio products and connected devices.
Yuneec: Major Chinese competitor and manufacturer of remote-controlled electric aviation designed for model making applications and to conduct aerial photography. The company’s aviation range from manned aircraft, electric drones, and audio controlled helicopters to micro-copters and camera supported quadcopters and hexacopters, enabling people to capture a broader picture and see live video of places from above.
UVify: Developer and manufacturer of autonomous unmanned drones based in San Francisco CA, designed to create amazing experiences with drones. The company’s drones can be used in drone racing, videography, freestyle flying, and research, enabling customers with intelligently designed, high-performance drones to fly farther and faster.
Autel Robotics: American developer of flying camera drones designed for aerial photography systems. The company’s flying camera drones utilize aerial engineering and camera drone technologies and develop quadcopters and flying remote control GoPro camera systems, enabling users with superior aerial imaging, filming, and photography.
Excellent business model and differentiated technology getting marred by trade tensions and emerging regulations
Market Saturation and growing competitive pressure growing headwinds: Unless DJI finds more markets for its products or meaningfully expands its product suite, its growth is likely to stagnate. Also, several other competitors are spending a lot more attention and money on this segment, and we expect higher competition going forward. At the current stage, DJI’s popularity is caused by a temporary situation where the flight systems powered by the above companies are not competitive enough in terms of stability, maximum flight time, and human interaction. However, as DJI’s technology in consumer drones reaches a ceiling, it is only a matter of time for other system providers to catch up with DJI.
Trade Tensions in the Global Markets can impact both supply and demand: The last two years have witnessed various cases of deglobalization, which is considered especially harmful for the development of tech firms. In DJI’s case, the risks aroused by the trend of deglobalization involves every step from production to sales of DJI’s business. On the production side, the company heavily relies on overseas hardware suppliers. The core components such as motion sensors, CMOS sensors, and GPS modules are mostly provided by the US and European companies. If DJI is blacklisted by the United States, it will lose access to motion tracking sensors that are supplied by InvenSense, Phantom series chips provided by Atmel, visual processors from Intel, and the WiFi SoC from Qualcomm. Not to mention the loss of almost 50% market share. This uncertainty is going to act as a glass ceiling to DJI’s IPO valuations and further share appreciation.
Dependency on non-domestic markets: The company has around 80% of total revenue from outside China and around 40% from the US market. Any change in regulations in the USA and EU can lead to significant disruptions to the business. In China as well, the company is now facing changing regulations that restrict the easy sale of more sophisticated drones
In a nutshell, DJI is likely to continue its pole position in the drone market for the near future with better technology, a large product stack, and a competitive manufacturing setup. However, there is a regulatory overhang over the company that stops it from commanding the kind of valuation a profitable company with $ 2 Bn+ revenue should command in current market conditions. We are sanguine about the prospects of DJI in the near term.
DJI Innovations is evaluating an IPO in mainland China and Hong Kong in early 2021. In this...
Listing gains are likely to be capped by reputational concerns around an otherwise enviable product stack.