BA - Archer Aviation: Buy The Commercialization Runway With Boeing

2023-08-11 14:33:31 ET

Summary

• Archer Aviation is taking steps to de-risk its path towards successful commercial deployment of its eVTOL aircraft.
• The company has diversified its end-markets by securing a contract with the US Air Force for its Midnight eVTOL.
• Archer Aviation has also secured additional funding, including $215 million from Stellantis, United Airlines, and Boeing, providing them with 10 quarters of cash.

Manufacturers of eVTOLs provide some of the most forward-looking and futuristic investment opportunities with significant upside. However, the path towards certification and commercialization is not a risk-free one and when highlighting the risks I am quite often met with readers who choose to ignore the risks and become hostile towards those who don’t echo the same bullish stance as them. The good thing for Archer Avia tion ( ACHR ) is t hat over the past weeks, the company has been doing the right things to increase its chances of a successful commercial roll-out. For the eVTOL permabulls this is obviously evidence that they were right all along, but the reality is that the de-risking path was not at all written in the stars.

In this report, I will be looking at some of the de-risking elements that should help Archer Aviation increase its chances of successful commercial deployment and might actually warrant a stock rating upgrade to buy.

End-market Diversification

While the FAA has claimed it aims to create a smooth and predictable path towards certification and commercialization of eVTOL products, we do see some criticism from eVTOL manufacturers on the position of the FAA regarding certification. With that in mind, diversifying the end-market is a welcome de-risk. Earlier we saw, Archer Aviation appoint former FAA administrator Nolen which without doubt should help the company achieve a smoother path towards certification of their Midnight eVTOL.

On July 27, we saw the US Air Force awarding Archer Aviation a $110 million firm-fixed-price, indefinite-delivery/indefinite-quantity contract for Midnight Based Advanced Vertical Lift with $1.3 million in funds obligated. The wording that the US Air Force uses tends to be vague, but in simple words it means that the US Air Force wants to fly the Midnight eVTOL and it provides Archer Aviation with another end market which could help it bridge any gap towards commercial deployment as an urban air mobility solution.

Archer Aviation Secures Additional Funding

During the second quarter, Archer Aviation had cash, cash equivalents and short-term investments of $407.6 million including $25 million drawn from the Stellantis $150 million credit facility. In total, the cash pile reduced by $42.3 million and the cash burn would be $67.3 million, which is better than the $80 million I used in my previous assessment.

At a burn rate of $67.3 million, Archer Aviation has cash for six quarters ahead while commercialization is aimed for in 2025. The US Air Force contract provides some padding and Archer Aviation has also secured additional liquidity in the amount of $215 million from Stellantis, United Airlines and Boeing. The exact amounts committed are not known at the time of writing, but the partnership with Boeing is an important one beyond any capital infusion Archer Aviation will receive. Archer has agreed to make Wisk its exclusive provider of autonomy technology for future variants of Archer’s aircraft, which in a world with pilot shortages could benefit Archer Aviation over time. Simultaneously with this agreement, the parties have reached a settlement to resolve the federal and state court litigation on undisclosed terms.

Important to keep in mind is that the $215 million investment package also includes the $70 million from Stellantis announced in January. The January investment package included three milestones which would give Archer Aviation access to $25 million, $70 million and $55 million respectively. The $25 million has been drawn in the second quarter of 2023, while the $70 million investment has been accelerated. What this basically means is that from the $215 million, $145 million is fresh funds that can be used likely upon reaching certain milestones and the $70 million will be accelerated with the $55 million from the initial packing remaining undrawn. In total, this gives the company an additional $270 million to draw across all investment packages and would put the cash and cash equivalents at $677.6 million providing the company with 10 quarters of cash, which I believe should be sufficient to execute the path towards commercialization by 2025.

Conclusion: Archer Aviation Could Be Your eVTOL Maker To Buy

I have had a hold rating on many eVTOL manufacturers. However, while risks remains, I do believe that Archer Aviation is one of the eVTOL manufacturers that has become more of a buy than a hold. The company has recently added the former FAA administrator to its team, it has diversified the end-markets, and it secured additional funding, technological collaborations and industry partners. All of that reduces the need for additional funding rounds although we cannot be certain whether that will be enough to reach commercialization, but Archer Aviation is now in a stronger position than it was before and beyond the funding element I am liking the autonomous flight technology agreement they have with Boeing as it can help the company roll out its Midnight eVTOL more efficiently. The risk that investors should continue to keep in mind is the risk of dilution as the investment packages that Archer Aviation secures allow the eVTOL specialist to issue shares to for instance Stellantis.

Furthermore, the stock can remain volatile. Today’s price action is an example of that. After spiking yesterday, the stock is now trading down. One day price actions can bring you success, it can also burn you badly if you get in at the wrong point. However, if you truly believe in the long-term of Archer Aviation in the eVTOL market then a speculative buy and hold is compelling at this point.

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