The bull market may be returning. Investors in Archer Aviation(NYSE: ACHR) certainly think so, with the stock shooting up close to 70% in the past month on the back of an optimistic earnings report. The upstart builder of electric air taxis is trying to disrupt the transportation market with its new Midnight aircraft and has orders from governments and corporations around the world.
However, the company is still in the certification stage and is not generating any revenue at the moment. With the stock soaring, should investors buy Archer Aviation stock below $13? Let's run the numbers and investigate further.
Betting on transportation disruption
Electric air taxis -- sometimes called eVTOLs -- are aiming to disrupt the transportation market and alleviate traffic in large cities. There are plenty of start-ups trying to build these aircraft, with Archer Aviation being one of the leaders. With advancements in materials and electric propulsion, Archer Aviation's Midnight aircraft can theoretically safely and quietly fly a group of four people above a city, skipping the vehicle traffic below.
Initial contracts are set with carriers such as United Airlines and with the city of Abu Dhabi in the Middle East. In New York City, Archer Aviation is planning to have a takeoff site in Manhattan to various airports in the surrounding area, turning what could be a two-hour drive into a 10-minute air taxi ride. With a price tag of around $5 million per vehicle, Archer Aviation is betting that air taxi operators will be able to sell tickets for a pretty penny, especially to wealthier clientele.
More excitement is coming from Archer Aviation's recently announced partnership with Palantir Technologies, a stock that growth investors love at the moment. Details of the partnership are scarce. The two companies aim to work on implementing artificial intelligence (AI) into next-generation aviation technologies, which include hardware and software.
Image source: Archer Aviation.
Major cash burn and zero revenue today
Investors are excited about the potential of Archer Aviation and its disruptive aviation technology. However, this is a product in the very early stages.
The Midnight vehicle is still only through 15% of the Federal Aviation Authority's (FAA) compliance verification documents, and while management says the certification should move quickly throughout 2025, there is still a risk that the Midnight will not get approved for use in the United States. The FAA certification is generally what leads to certifications in other major countries around the world, meaning this is vital for Archer Aviation's business viability.
A lot is hinging on the FAA's approval to operate the Midnight aircraft. If it does, then we have full steam ahead to try and build air taxi networks in cities around the world. Until then, the company is going to generate zero revenue and have major free cash flow burn. It has burned $450 million over the last 12 months, causing management to raise money through an equity raise in Q1 of this year.
At the end of Q1, it had just over $1 billion in cash on the balance sheet, giving it around two years of runway to get this project off the ground.
As a consumer, I hope Archer Aviation's air taxi project gets off the ground (no pun intended). It would provide a valuable service to society and save people time wasted stuck in traffic.
As an investor, I do not like the idea of buying Archer Aviation stock. Pre-revenue companies are high risk and barely ever work out for investors. With Archer's market cap at $6.6 billion today and the prospects of more equity dilution down the line, investors are pricing in hundreds of annual orders for the Midnight aircraft today. This means that even if the Midnight is a successful product, the stock will only be fairly valued at today's price.
Archer Aviation is losing a ton of money right now. If the FAA delays certification for the Midnight, the company could run into huge liquidity troubles within the next few years, which would crush the stock price.
Even if the Midnight is approved, it is not clear what the total demand for air taxis will be in metropolitan areas around the globe. You can only have so many vehicles flying above residential neighborhoods before people and regulators start getting nervous. Operating an air taxi network will require top-notch safety standards with lives at risk.
This makes the Archer Aviation stock story that much more difficult to grasp. With minimal upside from today's price and a lot of downside risks, Archer Aviation stock is one to avoid below $13 a share.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
