Since the advent of the automobile — and therefore traffic — drivers have long dreamed of taking to the air. Fast forward to the present and electric air mobility firm Joby Aviation (NYSE:JOBY) is investing considerable resources into just that. However, Deutsche Bank just cut through the hype today, targeting some overlooked risk factors. Now, a subsequent downgrade is sending JOBY stock back to earth.
Specifically, analyst Edison Yu downgraded Joby shares to “sell” from “hold.” The analyst also cut his price target to $4 per share. JOBY stock trades hands at approximately $4.20 as of this writing, or about 6% below its prior close. Even then, Deutsche Bank’s adjusted target implies additional downside risk of around 5%.
Primarily, Yu sees technical concerns that may hinder JOBY stock. The analyst said in a note to investors:
“Operationally, despite Joby being perceived as the leader in the industry, the developmental path of its [electric vertical takeoff and landing] aircraft seems increasingly challenging to us as we think the aircraft is dealing with weight management issues.”
JOBY stock faces underlying compliance vagaries as well. Per CNBC:
“Yu said Joby is currently building an iteration of its eVTOL that’s ‘company conforming,’ meaning it will not get any testing credit with the Federal Aviation Administration when it has a pilot onboard.”
CNBC also cited Yu’s concerns that “there is not good visibility on the regulation and certification process for its aircraft with different parts of the project at different stages.”
JOBY Stock Has Promise and High Risks
Of course, JOBY stock — assuming the stars align perfectly — represents a game-changing narrative. Essentially, outside of routine air traffic, this space is largely untapped. Therefore, Joby may be able to help redirect street traffic to the air.
Indeed, there are significant potential economic returns here. Prior to the pandemic, the average urban commuter spent about 54 hours each year sitting in traffic. At scale, this costs the U.S. economy around $179 billion annually, according to a report.
Joby’s eVTOL may even help alleviate the noise problem associated with helicopters with its “low noise footprint.” However, JOBY stock and the underlying industry isn’t without major risks.
For one, eVTOLs have some safety concerns. With the rise of traffic fatalities following the pandemic, the implementation of another plane of mobility is a huge variable here.
Cost structures present another unknown. To be fair, the company and other eVTOL specialists target future economies of scale to shift the narrative favorably. But getting to that point, as Yu suggests, is no guarantee.
Finally, Joby may face some social inequity criticisms. With millions of Americans already struggling against a possible recession, facilitating a platform for the affluent to fly over everyday problems does not invite an encouraging view.
Why It Matters
For the past three months, the consensus rating for JOBY stock is a “hold.” According to TipRanks, the average price target for shares stands at $7, implying upside potential of about 66%. This target was boosted by Morgan Stanley analyst Kristine Liwag in particular, who placed a $10 price target on the stock.
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On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.