AAL - Archer Aviation: eVTOL Stock Flying High

2023-06-15 07:00:00 ET

Summary

• Archer Aviation stock has more than doubled since my last coverage.
• eVTOLs have been riding a positive wave of momentum.
• Appointment of former FAA administrator has significant advantages for Archer Aviation's success.

Last month, I covered Archer Aviation (ACHR) and put a Hold rating on the stock. Since then, the stock has significantly increased in value. In this report, I will discuss the primary reason for the increase and whether that affects my rating in positive or negative direction given the subsequent run up.

Why A Hold Rating And Not A Buy Rating?

Since my last report, Archer Aviation stock has appreciated by 130% easily outperforming the market. In retrospect, you might say that the better rating would have been a Buy rating but that is not how things work. The reality is that holding the stock would not have hurt you, on the contrary. I also stand by the reasoning for the rating and that reason is really simple. Every eVTOL maker is facing a race against the clock to have their product certified before additional capital raises are required. In my view, as I said before with a background in aerospace engineering I might very well have a view that is too pessimistic, there are significant chances that many eVTOL makers might not make it to the finish line. The space is crowded and gaining fresh capital from new partners has been challenging. Additionally, I find that eVTOL makers generally provide little insight. They have timeline projections but refuse to translate this to cash burns and liquidity matters. Many companies keep repeatedly pointing at the huge potential, but they are not laying out to investors how they plan on getting there from a financial perspective.

Perhaps that is where my risk appetite as an investor and risk appetite as an engineer collide. As an investor I see that the stock is trading relatively low compared to its upside in case the company is successful. This would warrant a speculative buy position, just in order to not miss the boat if things work out after all. As an aerospace engineer, I see the promising technology, but I am also aware that at this point the companies should be able to make multi-year cash burn projections underpinned by a set of assumptions and provide a sensitivity analysis and most companies are simply not doing that while it is actual part of engineering projects, which eVTOL designs definitely are. I hear constant talking about commercialization of urban air mobility, but eVTOL makers realistically are showing us close to nothing on how they are seeing that path ahead apart from the certification timeline. So, with my view as investor and as an engineer I have rated many eVTOL manufacturers a Hold rather than a Buy, but it is really a matter of risk appetite and how much transparency or projections you want (or not).

Why Did Archer Aviation Stock Rise?

Interestingly, Archer Aviation stock started rising on the day my first report covering the company was published and while I would like to take credit for the stock rise, my report had nothing to do with the share price appreciation. The fact of the matter was that a day before my report was published Archer Aviation reported earnings triggering investors to sell off making the stock drop to $2 per share. Like it is with investing, the exit point for one is the entry point for someone else and $2 per share was reasonably compelling enough for some investors to load shares with downside being limited with upside being plentiful if successful. That already was good enough for the stock to rise from $2 to over $3 per share or a 50% increase.

The Notice of Proposed Rule Making or NPRM was made public yesterday but already announced earlier in June. While the notice is mostly to share proposed rule making on the rules for piloting eVTOLs, the first thing I noticed and is clearly a positive is that no changes have been made to the way the aircraft certification happens. Any change to that could potentially make timelines shaky. Another positive I saw is that the FAA plans to allow pilots of the eVTOL manufacturer to gain experience through training activities and certification activities which would allow those pilots to become the first flight instructors. This would eliminate a major challenge of getting a training pipeline going as advanced air mobility is commercialized. In that regard, the proposed rule making is similar to what is currently applied to traditional airplane manufacturers which I think speaks of the trust in the capacities of the eVTOL manufacturers. Additionally, the FAA is proposing alternate requirements to meet Pilot In Command flight time. A lot of this suggests that the FAA is very much aligned with allowing firstly for a safe operation and secondly for a successful commercialization of advanced air mobility solutions.

The only part in which the FAA and the industry are not aligned is on the need for dual control on training devices. The industry thinks it should not be a requirement, while the FAA thinks that longstanding requirement should be maintained.

You might ask by now why I haven’t touched at all on the appointment of former FAA administrator Nolen in a safety position at Archer Aviation. There are two very simple reasons. The first one is that I am discussing the reasons for the higher stock prices in chronological order and Nolen’s appointment was not made public until the 13 ^th of June even though the rumors had been there before and secondly it does seem that various eVTOL names got a big boost. This boost was somewhat lower for eVTOL makers that are following the certification path of other agencies. Lilium ( LILM ) and Vertical Aerospace ( EVTL ) eVTOL solutions are to be certified under the guidelines of EASA while Eve’s product ( EVEX ) is set to be certified under the jurisdiction of the Brazilian aviation authority which largely follows the FAA. So, a big boost for the entire eVTOL industry came from the news of the FAA and we saw Joby ( JOBY ) and Archer gain most since my report on Archer. 70% up for Joby and 130% up for Archer Aviation.

If we look at the performance since the FAA’s tweet on the NPRM for pilots, I observed a roughly 47% increase in share price for Archer and 25 to 30 percent for Eve and Joby indicating that the addition of Billy Nolen to the team of Archer Aviation has had significant positive impact on the stock.

So, the addition of Billy Nolen has been accretive to the stock price but I would say we also should keep in mind that the relative low share price for Archer Aviation has played a role as the downside (to zero) is lower compared to some peers and the upside if successful is big.

The Nolen Factor

So, why is the addition of Billy Nolen to the team such a big deal. The reason for that is quite simple. Safety is key and Nolen brings decades of experience to the team. He worked 26 years for American Airlines ( AAL ) as a pilot and after that he worked three years in a safety role at Airlines for America, two years at Qantas ( QUBSF ) in a safety role and two years in a safety role at WestJet before joining the FAA. At the FAA, he served one year as an associate administrator for aviation safety before becoming the acting administrator of the administration for a one year period. So, Nolen brings a lot of experience to the table. The only drawback possibly is that since 2015 he hasn’t held on to his positions for a long time, but other than that and especially with his experience at the FAA he is positioned extremely well to do great things for Archer Aviation in the certification process. I wouldn’t expect him to be able to slash the certification time for Archer significantly but he has the experience and know-how from regulator side to significantly ease the process and with that de-risk the timeline which also feathers in positively with any requirements for capital raises as it reduces the need for capital raises but if they are required with Nolen on the team raising capital could be easier, which is also why Archer Aviation stock skyrocketed 20% after the announcement of Nolen’s appointment.

So if we were to divide the 130% increase (base lined on the $2 stock price) of Archer Aviation by factor it would be as follows:

• 50 percentage points post-earnings share price recovery
• 30 percentage points for the FAA rule making.
• 31.5 percentage point for the appointment of Nolen.
• 18.5 percentage points for the relatively low share price of Archer Aviation.

Conclusion: Appointment Of Nolen Is A Significant De-Risk

I believe the appointment of Billy Nolen provides a significant de-risk in two aspects. The first is that the certification path could be more streamlined reducing the risk of delays and subsequently additional funding needs. Secondly, if funding is still required raising capital could happen at more attractive terms since having a former FAA administrator in the form of Billy Nolen on board should provide more confidence to provide capital to Archer Aviation. So, overall I am significantly more positive on the risk profile and while I am sticking with the hold rating I do think that the needle is slowly moving more towards buy but not just yet. At most, it is a more comfortable speculative buy at this point.

For further details see: