Shares of Archer Aviation (ACHR -3.29%) trade higher by more than 200% compared to this time last year. That's an incredible advance in a relatively short time. But there's a good reason why investors have become increasingly fond of the stock.
That raises the question: Is the 20% pullback from its most recent highs a buying opportunity now?
What does Archer Aviation do?
Archer Aviation is not the kind of stock that a conservative investor will want to own. It is attempting to build a capital-intensive business from the ground up, which pretty much ensures that it will lose money for years to come. Worse, the industry in which it hopes to compete is mature and dominated by a few established businesses. And the industry is also heavily regulated, further complicating the path toward sustainable profitability.
A Midnight model vertical lift short-haul aircraft. Image source: Archer Aviation.
Archer Aviation probably won't interest value investors, either. Given that it has no earnings, the company's price-to-earnings ratio is astronomical. And since it also has no significant revenue at the moment, the same is true of its price-to-sales ratio. In fact, its earnings statement starts with operating expenses, which highlights the very early stage of the company's development. The stock is basically a story stock trading on the belief that it will eventually succeed in creating a sustainable business.
That story, however, is enticing. Archer Aviation is attempting to build a vertical lift short-haul aircraft, which it calls Midnight. Midnight is expected to be used as an air taxi, also known as an electric vertical takeoff and landing (eVTOL) aircraft, ferrying commercial customers short distances and far above the traffic that often congests city streets.
What has investors so excited over the past year is that Archer Aviation is getting tantalizingly close to carrying its first commercial customers. Aggressive growth investors might find that an interesting-enough story to jump aboard the stock, particularly after a sizable pullback in the share price.
Data by YCharts.
How close is Midnight?
The big turning point for Archer Aviation will likely be when it gets the nod from the FAA for commercial use in the United States. It has a long way to go before that happens. However, the company is setting the groundwork now so it can hit the ground running when it does get final approval.
Specifically, Archer Aviation is increasing production at its facility. It will make up to 10 Midnight aircraft this year. That sounds like a small number, and it is, but you have to start somewhere, and ramping up is a complicated process. Going from making no aircraft to 10 is a big deal.
Most of the aircraft will be used for testing purposes, but the knowledge gained from producing them will be put to good use as production further increases in the future.
As for the air taxi business, Archer Aviation is also hard at work setting itself up for the future. It has FAA approval to operate a flight school and to operate as an airline. And it has early plans to operate air taxis in California and New York. When it gets FAA approval for the Midnight aircraft, the final puzzle piece will have fallen into place.
But the really important event in 2025 will likely happen in Abu Dhabi, United Arab Emirates. That's where Archer Aviation is currently working to set up its first air taxi service with a partner. That goal is to carry a commercial customer in 2025, which would basically prove the air taxi model works. After that, the big question is whether it works well enough to produce consistent revenue.
But even this effort plays into the company's ambitions in the United States, as Archer Aviation will use what it learns setting up the Abu Dhabi air taxi service to inform its efforts in the U.S. and other markets.
Should you buy Archer Aviation now?
As noted, conservative investors and those who care about valuation will not want to buy Archer Aviation now. The business will likely need to prove it has legs in the U.S. before either of these types of investors should consider buying the stock. For aggressive growth investors, however, the answer is a bit trickier.
Archer Aviation is making notable progress toward its goal of selling Midnight aircraft and supplying and/or operating air taxi services around the world. But you are buying the story here, not the results, because the business is still a work in progress.
Yes, the progress is ongoing and working out according to plan. But there is always the risk that things go awry when you are dealing with small, money-losing start-ups. Buying now will get you in early, which will likely be a good thing if things work out as planned. Just make sure you understand the risks before you buy, because things don't always work out as planned.
