When it comes to the electric vehicle (EV) market, most investors probably don't look past companies such as Tesla or Rivian Automotive. While both of these companies have built strong brands in the car landscape, there are other opportunities beginning to emerge within the broader EV realm.
One of the more popular areas includes electric vertical takeoff and landing (eVTOL) aircrafts, such as those built by Archer Aviation (ACHR 2.52%). Archer is looking to disrupt the aviation industry through its futuristic electric air taxis. From offering a new form of mobility in densely populated environments such as cities to introducing new stealth aircraft for the military, Archer has no shortage of interesting use cases. Among its fans is popular tech investor Cathie Wood.
With shares trading for about $10 as of July 7, is now a good time for investors to invest in Archer? Read on to find out.
Archer Aviation is an exciting company with a lot of potential, but...
Investment bank Morgan Stanley recently published a report in which research analysts estimated the size of what the organization calls the "low altitude market." By 2050, Morgan Stanley is forecasting the total addressable market (TAM) for low altitude aircraft to be around $9 trillion.
While Morgan Stanley's research includes other types of aircraft besides eVTOLs (i.e., drones) in its report, it is encouraging to see Archer's primary opportunity in air mobility is so large. When you explore Archer's potential to disrupt traditional modes of transportation while bringing much-needed innovation to the aviation industry, it's not surprising to learn that companies such as United Airlines and Stellantis have been eager to partner with the company.
On top of that, Archer's recent partnership with Palantir Technologies also suggests the company is exploring how software and artificial intelligence (AI) can play a role in the company's new aviation system.
With an order book worth roughly $6 billion, institutional investor support, partnerships with leading vehicle and aviation businesses, and use cases spanning commercial aviation as well as defense contracting, Archer might look like a no-brainer investment opportunity.
Image source: Getty Images.
...smart investors understand reality versus narrative
For now, Archer remains a pre-revenue business. In other words, the company's partnerships and growing order book haven't exactly led to tangible sales coming through the door just yet.
ACHR Cash and Equivalents (Quarterly) data by YCharts
While the chart above might imply that Archer's cash balance is strong, the company's rising research and development (R&D) costs and ongoing burn rate could quickly diminish its liquidity position. Despite this financial profile, Archer boasts a market capitalization of $5.4 billion. To me, that valuation reflects an exciting hype narrative as opposed to concrete fundamentals.
Is Archer Aviation stock a buy right now?
Although Archer stock may look "cheap" at $10 per share, the company's multibillion-dollar valuation seems overstretched considering there aren't any sales to back it up yet. In reality, Archer could be seen as analogous to a late-stage venture capital (VC) type of investment. The payoff could be enormous, but the risk profile is equal (if not larger) in size.
Another layer that could complicate the company's commercialization efforts revolves around regulatory approvals from the Federal Aviation Administration (FAA). In my view, there are too many uncertainties around Archer right now. While I am hopeful that the company has the potential to disrupt the aviation world, I think investing in Archer stock right now is too speculative.
It could be years before the company reaches critical scale and the stock price really takes flight. For these reasons, I would encourage investors to monitor Archer's progress but remain on the sidelines when it comes to buying the stock right now.
