BA - Archer Aviation: Flying Higher But Don't Chase

2023-08-21 18:15:50 ET

Summary

• Archer Aviation has seen a surge in stock market interest after attracting investments from key industry partners and investors.
• The company aims to launch eVTOL production and commercial services in 2025, with plans to deliver the first Midnight aircraft to the DoD in late 2023.
• The stock has an attractive valuation compared to the opportunity, but investors should buy weakness over the next 18 month crawl towards material revenues.

In a sudden move, Archer Aviation ( ACHR ) has become a darling of the stock market. The eVTOL aircraft manufacturer was nearly left for dead following the meltdown in SPAC stocks, but now investors are rushing into the stock after 300% gains. My investment thesis remains Bullish on the long-term prospects for the company, but investors shouldn't necessarily chase Archer Aviation higher with several years ahead until volume production.

Big Investors

Similar to Joby Aviation ( JOBY ), Archer Aviation has rallied on the company, attracting investments from partners. While the SPAC deals didn't provide a lot of investor confidence, the recent fundraising with key industry partners and investors provided legitimate confidence in the aircraft plans of Archer.

In total, the company collected $215 million in investments. Stellantis ( STLA ) invested another $70 million as part of the original funding commitment, Boeing ( BA ) invested and agreed to drop lawsuits and United Airlines ( UAL ) invested $25 million while investment firm ARK Invest ( ARKK ) invested $44 million.

The investments were announced along with the Q2 earnings report. Archer Aviation ended the quarter with a cash balance of $408 million, and the shares were sold to these key partners at $5.54 per share .

The company claims having $675 million in liquidity to get the business to the Midnight aircraft commercialization in 2025. The large U.S. Department of Defense contract and predelivery payments from the likes of United Airlines will provide additional cash receipts to fund the business.

Archer is burning about $70 million per quarter based on operating losses. A big key to shareholder gains will be the ability of Archer to either raise additional cash at higher equity prices or hit target for commercial launch in order to cut the cash burn.

Intriguing Valuation

The stock now has a valuation in the $1.7 billion range. The valuation might appear aggressive for the pre-revenue company, but the launch of eVTOL production and commercial services in 2025 will quickly ramp revenues.

The company has plans to deliver the first Midnight aircraft to the Air Force in 2023 and plans for high volume eVTOL production out of the Covington, Georgia facility in mid-2024. Archer Aviation isn't too far off original plans for commercial operations to lead to billions in annual revenues starting in 2025.

Analysts only forecast revenues reach ~$90 million in 2025, followed by $206 million in 2026. The United Airlines deal for up to 300 aircraft at $1.5 billion would value the eVTOL aircraft at ~$5 million each.

The company will scale revenues a lot faster than current analyst estimates. The biggest question is the timing of getting FAA approval and starting to produce aircraft to either sell to United Airlines or operate an urban air mobility ((UAM)) service producing an estimated $2.4 million in annual revenues per aircraft.

The analyst estimates would suggest 2025 revenues are for less than 20 aircraft, while Archer Aviation originally forecast 250 aircraft produced in the first year. The company hasn't missed much of the original targets when announcing the SPAC deal for analysts to suggest actual revenue numbers fall so far behind original targets.

Archer still targets producing up to 2,000 units annually somewhere during the 2025 to 2028 period. The goal is for around 50% of revenues from selling aircraft to the likes of United Airlines in the beginning.

The current stock valuation will turn appealing once Archer Aviation ramps production into hundreds of aircraft annually and starts operating a larger portion of those for UAM services. The company will quickly head towards billions in annual revenues, with the only question being the exact timing.

Takeaway

The key investor takeaway is that Archer Aviation remains a high risk investment, with the company still needing FAA certification of their new eVTOL aircraft. The company is at least 18 months away from commercial production volumes, so investors will wisely buy the stock on weakness and not chase big rallies.

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