In a world that is constantly changing, commercial aviation has remained remarkably boring. Commercial jets still use many of the same basic designs developed in the mid-20th century. And propeller-driven helicopters still use similar propulsion as when they launched in the 1940s.
However, electric vertical takeoff and landing aircraft (eVTOLs) promise to bring some much-needed disruption to the industry. Instead of fossil fuels, these tiny aircraft run on lithium-ion batteries, making them mechanically simple, lightweight, and relatively silent. The technology could revolutionize urban air mobility, potentially creating billions of dollars in shareholder value in the process.
Let's dig deeper into the pros and cons of Archer Aviation (ACHR +2.88%) stock to decide if it is a good way to bet on the long-term opportunity.
NYSE: ACHR
Key Data Points
When will eVTOLs be ready for prime time?
Wall Street is incredibly optimistic about eVTOLs, with J.P. Morgan estimating that the opportunity could be worth a whopping $1 trillion by 2040 as the small electric helicopters replace ground-based taxis on key high-traffic routes (such as between airports and city centers). Archer Aviation is an early mover, with an ambitious strategy where it aims to be both a leading manufacturer and service provider.
The company has partnered with automotive giant Stellantis to build a large manufacturing facility in Georgia, where it aims to produce 650 of its Midnight aircraft annually by leveraging the larger company's manufacturing expertise. But this is only half of Archer's business model.
Instead of only producing eVTOLs, Archer Aviation is also pursuing the regulatory approvals to launch an air taxi service of its own in the U.S. and other jurisdictions, such as Abu Dhabi and Japan, where it has formed a joint venture called Soracle with Japan Airlines. This vertical integration strategy could dramatically expand Archer Aviation's potential addressable market while also securing large customer deals.
For example, Soracle has already announced its intention to purchase up to $500 million worth of Archer's Midnight aircraft. And these types of agreements could be vital to helping the company build an economic moat and scale up its manufacturing over the coming years.
What do the numbers look like?
Unfortunately for Archer Aviation, full eVTOL commercialization is still a while away, even in the best-case scenario. In the meantime, the company's operational results are alarming, to say the least. The company generates essentially no revenue, but burned through around $175 million in the third quarter, mainly because of research and development spending, which involves testing its Midnight eVTOL program.
Image source: Getty Images.
With just $595 million in cash and equivalents on its balance sheet, the company is very likely to turn to outside sources of capital, such as equity dilution. While this strategy is less risky than debt financing, it can undermine long-term shareholder returns by increasing the number of stock units relative to value metrics such as earnings or cash flow.
The good news is that Archer may achieve some early commercialization next year as it launches air taxi trials as part of the White House's eVTOL Integration Pilot Program. However, the company is still waiting on certification from the Federal Aviation Administration (FAA), which will approve the airworthiness of its Midnight aircraft design and components. It is unclear when (or even if) this key milestone will be achieved.
Is Archer Aviation a buy?
Archer Aviation's compelling vertical integration strategy and partnerships with other companies could set it up for success in the race for commercial eVTOLs. And while important regulatory milestones could be reached in 2026, that's still a big if.
Investors should tread carefully with these types of companies because at this point, success or failure depends on factors outside management's control. It makes sense to wait for more information before considering a position in the stock.
