TuSimple: A High-Risk/High-Reward Autonomous Trucking Play (NASDAQ:TSP)

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TuSimple (NASDAQ:TSP) aims to disrupt the multi-trillion trucking industry and could see solid long-term upside from its £2.3 billion valuation, but regulatory and safety concerns may pose major headwinds to commercialization plans. TuSimple has struggled since its IPO just over a year ago, losing nearly 75% of its value as it hovers at the £10 range. As the company progresses with partnerships and commercialization plans in the next few years, shares look to be a bit of a risky bet on an autonomous future, with high upside potential met with the possible risk of failure.

TuSimple Expanding AFN Via Partnerships, Reservations

TuSimple recently announced a partnership with Werner Enterprises (WERN) for roadside support and service for TuSimple’s Autonomous Freight Network, signaling the next step ahead in the path to full commercialization.

Roadside assistance will help support fleets with integrating TuSimple’s autonomous trucks by providing the means necessary to have trucks running routes 24/7.

Other recent partners include Loadsmith and Union Pacific (UNP). TuSimple announced a 350-unit reservation from Loadsmith for 2024 delivery of L4 autonomous trucks, and it has just delayed its rollout with UNP until Q3 in order to haul intermodal containers. TuSimple also is working with UPS (UPS), U.S.

Xpress (USX) and others. Building out an extensive partner network not only helps accelerate commercialization by getting autonomous trucks on the road, but also helps validate TuSimple’s tech with launches with respected logistics firms.

As a result, TuSimple has recorded 7,475 reservations for its autonomous trucks, up ~7% q/q as TuSimple has expanded with more partnerships.

TuSimple noted that during Q1, “we added 500 reservations with blue chip partners building commercial success on the back of our technology advancements, including the start of Driver Out operations.” Moving forward, it’s expected that TuSimple will continue to build out its reservation backlog, growing out its stream of potential revenue when/should it get to commercialization.

At the moment, revenues are quite insignificant, just £2.3 million, as commercialization has not yet happened. However, a second quarter of a q/q decline in R&D alongside tiny incremental growth in SG&A suggest that TuSimple sees itself being close to commercialization – the hard, expensive part validating and testing the autonomous trucks is mostly complete. Now, what’s next is the ramp to full commercialization, order fulfillment, and network expansion to solidify growth – TuSimple said it “will release more precise milestone timing in the coming weeks.”

TuSimple’s Long-Term Plan

TuSimple: A High-Risk/High-Reward Autonomous Trucking Play (NASDAQ:TSP)

TuSimple planned commercialization map (TuSimple via TT)

For the long-term roadmap, TuSimple aims for commercialization and road use of its trucks to occur on its AFN through Arizona and Texas to start, expanding across the Southeast, before reaching a nationwide scale.

Upon announcing the Loadsmith reservation order, TuSimple noted that by “the end of 2023, TuSimple plans to carry paid freight operations in Arizona and the ‘Texas Triangle,’ one of the country’s busiest freight regions.” With Q1’s release, TuSimple announced that it “added two additional AFN terminals in Houston and Laredo, TX co-located at Ryder maintenance facilities in prime freight locations. These terminals will serve as start and end points on our AFN, provide bundled maintenance services to support commercialization, and provide a continuously operational access point for our customers.” TuSimple is working quite quickly to pave the way for commercialization to begin in the Texas corridor, where it has four operation bases and a handful of customer terminals.

The first phase of commercialization is expected by the end of 2023/start of 2024 in Arizona and Texas, with some of those orders such as Loadsmith’s aiming for full commercialization in 2024. However, there are risks that TuSimple’s commercialization and expansion plans to reach a nationwide scale will be too aggressive.

Back in July 2020, TuSimple announced it “plans to add service between Los Angeles and Jacksonville, Fla., in 2022-23 to connect the East and West coasts.

From there, the company aims to expand across major shipping lanes throughout the contiguous 48 states in 2023-24. When that nationwide rollout is complete, TuSimple plans to replicate the same strategy in Europe and Asia” (see graphic above). However, it’s already nearly halfway through 2022, and TuSimple’s announcement of mapping only areas it intends to operate (starting with AZ/TX), as well as production of trucks being delayed until 2025 may mean that those phase two expansion plans to the Southeast may end up being delayed substantially.

Asia is limited as well, with TuSimple exploring options to divest its China business.

A Commercialization Delay

TuSimple also announced that it “is delaying commercialization of its purpose-built autonomous trucks until 2025 while relying on retrofits of existing Navistar equipment to expand driverless routes from Arizona into Texas.” There’s nothing necessarily inherently wrong about retrofitting trucks, other than that it may restrict the scale of commercialization early on, and delay revenue generation at scale since full commercialization with its own outfitted trucks won’t occur until 2025 or later. TuSimple CFO Pat Dillon said the retrofitted trucks will allow the start of commercialization in late 2023/early 2024. CEO Xiaodi Hou “still expects to commercialize driverless autonomy before any competitors.”

FreightWaves said the “slowdown by the acknowledged leader in autonomous trucking suggests that the 2024 date for commercialization may be too aggressive.” In which it has a point – referring to TuSimple’s original expansion plan, it’s already looking to have fallen behind, with production unable to allow the full route expansion to occur in those original timeframes.

As a result, nationwide scale may not be reached until 2025 at the earliest, potentially out to 2026/2027 given the time it could take to build out autonomous infrastructure such as operation hubs, and planning out routes. This is not taking into account regulation, or safety risks.

Are Regulatory Frameworks And Safety Concerns Headwinds?

Although policymakers are attempting to progress towards national standards for autonomous vehicles, that hasn’t happened yet. US Transportation Secretary Pete Buttigieg “told a Senate panel Tuesday that while autonomous vehicles are a priority for the department, legislative action from Congress is needed to expand their testing and deployment.” Safety standards have also not been set to a nationwide framework, especially for testing – some states like California, Arizona, and Texas are more progressive with AV policy, and allowing driverless test runs, while other states simply don’t allow it yet.

Regulatory framework, if/when established, plays a massive role in TuSimple’s scale and path to commercialization.

If regulatory efforts are drawn out into 2023/2024, national and regional expansion plans may see headwinds, if driverless operations are not fully allowed. TuSimple’s business model is completely reliant on national acceptance, adoption, and allowance of driverless/autonomous vehicles. If that fails to occur quickly, TuSimple could be forced to limit medium-term expansion plans.

Safety also serves as another important factor elevating risk to shares. Autonomous vehicles have already faced stiff headwinds due to accidents/crashes – one of the underlying notions of an autonomous vehicle is increased safety – and if accidents do occur, the question that looms is how will that incident impact the autonomous industry as a whole?

Uber (UBER) had quite the high-profile incident when an autonomously driven vehicle struck and killed a pedestrian in 2018, and current AV operations are not fully out of the woods from a consumer-trust standpoint. Trust is essential for autonomous vehicles to scale, for drivers to trust the vehicles next to them on interstates, etc.

In a way, commercial AV trucks have a “less challenging” safety profile, since they do not carry or transport people, like a passenger AV. Thus, from a pure safety perspective, the AV truck’s risk is lower since an isolated accident (in which only the truck crashes) will have no impact on a human rider. But overall, any major crashes, or repeated incidents, etc., with autonomous vehicles can threaten to severely impede the progress of the industry, of which will definitely impact TuSimple’s operations should it occur.

A Risky Bet

At just a £2.3 billion valuation, similar to rival Embark (EMBK) and about half that of Aurora (AUR), TuSimple’s comparative valuation gives it an attractive risk-reward profile against peers.

Commercialization delays, even with the extensive expansion plans, represent a minor headwind relative to the regulatory and safety risks present in the industry.

Even so, TuSimple still holds a decently attractive valuation for a speculative investment at the moment, given the time to commercialization.

With £1.2 billion in cash, trading at just a 2x cash multiple and assuming a burn rate averaging ~£100mm/quarter, TuSimple has leeway until 2024/25, when it plans to be generating revenue from commercial operations.

Raising cash may not be necessary for four to six quarters at the moment.

If TuSimple can successfully commercialize relatively in line with its stated timelines, and scale internationally, the upside potential can be quite massive as a multitrillion-dollar-industry disruptor, but again, the risks weigh heavy on that picture.