Aurora Innovation

Aurora Innovation held its analyst and investor day event.

Why it matters: Aurora shares were down 3% on the day as the market reacted to a delay in positive gross profit generation and lower long-term gross margins versus management's prior forecast. We reduced our long-term gross profit assumption to reflect the lower-margin guidance. However, we raised our revenue growth forecast as we think Aurora's driver-as-a-service revenue will grow faster than our prior forecast. We think Aurora's asset-light model can support faster growth as the company wins more long-haul trucking routes over time. The event featured multiple Aurora customers discussing Aurora's software driving trucks in a safe and reliable manner. Aurora management also highlighted its lower total cost versus human drivers. This supports our view that autonomous driving will take share in long-haul trucking.

The bottom line: We raise our fair value estimate to $15 from $12 for no-moat Aurora Innovation following the company's analyst and investor day. The increase reflects faster revenue growth assumptions than our prior forecast, partially offset by lower gross margin assumptions. At current prices, we view Aurora shares as materially undervalued, with the stock trading at less than 50% of our updated fair value estimate, which puts shares in 5-star territory.

Big picture: We forecast autonomous trucks will make up 40% of US trucking miles by 2040. Adoption will be driven by trucks that can run at a lower total cost, be safer, and have higher utilization than human-driven trucks. Aurora is well-positioned to be a leader in US autonomous trucking and be a winner from the transition.

For more information in our long-term autonomous trucking outlook, see our report, “Roll on Big Robot: AVs Will Drive 40% of US Trucking Miles by 2040.”

We raise our fair value estimate to $15 from $12 for Aurora Innovation following the company's analyst and investor day. The increase is due to faster revenue growth assumptions versus our prior forecast, partially offset by lower gross margin assumptions. We use a weighted average cost of capital of around 12.5%.

In 2026, we forecast that Aurora will continue to advance toward the launch of its driver-as-a-service business model. We see revenue growth but negative gross profits as the company’s expenses will still be far higher than its revenue.

Long-term, we assume Aurora succeeds in scaling up its DaaS model and experiences strong growth over the next decade. We think Aurora is likely to reach management's 2030 revenue target of $5 billion. We forecast that autonomous driving will see growing adoption in the semitruck market. By 2040, we forecast that autonomous trucks will account for 40% of semitruck miles driven in the US, while Aurora maintains a strong market share. The growth results in profitability and positive free cash flow generation for Aurora by 2029, with strong growth thereafter.

We assume Aurora will need to raise $2 billion in equity from 2026 through 2028 to fund expenses as it ramps up and scales its DaaS model.

Given the wide range of outcomes, we also model additional scenarios.

In our downside scenario, our fair value estimate would fall to $3. In this scenario, we assume a slower growth rate for Aurora, resulting in a longer path to profitability. In this scenario, Aurora does not become profitable until 2031 and generates positive free cash flow in 2032, three years after our base case.

In our upside-scenario, our fair value estimate would rise to $40. In this scenario, we assume a faster growth rate for Aurora, driving strong profitability and free cash flow generation in the 2030s.

We assign Aurora Innovation a no-moat rating.

The company successfully developed its Aurora Driver autonomous driving system and is now generating revenue. We forecast that Aurora will successfully expand and scale its autonomous driving business, and we see traces of intangible assets and switching costs.

Intangible assets come from the company’s proprietary autonomous driving software, which can drive a heavy truck on roads, including interstate highways, from point to point. This will allow fleet operators to run their trucks for longer periods each day, as an autonomous truck is not subject to hours-of-service limitations, which reduce the number of miles a heavy truck can drive each day. Additionally, Aurora’s autonomous-driving trucks will reduce costs for its fleet-operator customers. This will come from Aurora’s subscription software costs being lower than human drivers' wages and benefits, and from more fuel-efficient driving, which leads to lower per-mile fuel costs. The differentiated software would create intangible assets for Aurora.

Additionally, Aurora has proprietary hardware to run its autonomous driving system. Aurora developed its own light detection and ranging, or lidar, device that can detect objects up to three times the distance of current lidar devices. It also runs a continuous wave, rather than sending out light pulses to bounce off objects. This results in no interference from the sun or other lidar devices, both of which are drawbacks of using standard lidar hardware. As a result, Aurora’s hardware should enable its software to operate a truck more safely over time, as the ability to scan longer distances without interference should enable the software to slow a truck down earlier if needed. As Aurora’s software operates heavy trucks with full cargo loads that can weigh up to 80,000 pounds, every second of stopping earlier is crucial to avoiding an accident.

Additionally, we see traces of switching costs arising from Aurora’s proprietary hardware system, which will be installed on trucks and can drive autonomously only with Aurora’s software. If Aurora can sell trucks to a major fleet operator, that operator will need to run Aurora’s software, thereby locking in Aurora as the autonomous driving software provider.

We see the potential for Aurora to develop a moat over time. Yet the threat of material value destruction looms if the company is unsuccessful, which leads to our no-moat rating. Aurora is not yet profitable and has not generated positive free cash flow. The company is a first mover in US autonomous-driving heavy trucks. However, other competitors are entering the space and could develop better technology, which could take market share from the company even if adoption of autonomous driving in heavy trucks continues to rise.

Aurora has the best autonomous driving hardware and software for semi-trucks. This will lead the company to increase revenue faster than expenses, driving profitability and positive free cash flow.

Aurora is an attractive partner for semitruck fleets as the company’s driver-as-a-service model will reduce operating costs per mile.

Aurora will eventually expand into other areas including ride-hailing and local goods delivery, expanding its total addressable market.

Aurora’s negative free cash flow generation will result in additional equity raises that will dilute shareholders.

Aurora will face increasing competition in autonomous driving software in the coming years, leading to slower growth and lower per-mile pricing over time.

Aurora will remain unprofitable as it will continue to incur rising expenses to develop its autonomous driving software.