ACHR - Archer Aviation: Gaining Momentum Towards The Future Of Sustainable Aviation Despite No Revenue

2023-11-29 01:48:00 ET

Summary

• Financials: Archer Aviation, pre-revenue, reported no Q3 2023 revenue and a $51.6 million loss. Q4 anticipates $100-110 million in operating expenses.
• Operational Highlights: ACHR advanced its Midnight air taxi and secured $142 million in U.S. Air Force contracts. Risks include high debt reliance and operational challenges.
• Valuation and Risks: Strong liquidity but negative profitability metrics. Market undervaluation may indicate potential, but risks include competition, regulatory hurdles, and infrastructure costs.

Thesis Summary

Archer Aviation ( ACHR ) is a California-based electric vertical take-off and landing ("eVTOL") aircraft developing company founded in 2018. The company aims to transport people in its air taxis, presenting a glimpse of a futuristic cyber world. Archer Aviation aims to have its eVTOL aircraft transport people in and across the cities. The company claims that its eVTOL aircraft range around 100 miles and can reach up to 150 miles per hour.

Archer Aviation recently announced its third-quarter results . Being a pre-revenue company, it didn't post any revenue as expected.

However, ACHR stock has seen a significant surge due to future deals in the pipeline. If we look at the chart, the stock has seen a substantial surge in the past year. The growth is understandable if looked at its MOUs are considered. This has contributed to gaining the investors' trust, due to which the stock has been the investor's favorite, and its trajectory has remained upward in the past year.

This optimistic outlook, therefore, contributes to our buy rating.

Q3 2023 Highlights

Like any other pre-revenue company Archer, Archer Aviation announced zero revenue. Its operating expense is $46.2 million, declining 47% YoY.

The company announced a net loss of around $51.6 million and had cash and cash equivalents of approximately $461.4 million at the end of the third quarter.

For the fourth quarter, the company expects GAAP total operating expenses of $100 million to $110 million and non-GAAP operational costs of $75 million to $85 million.

The company achieved some significant milestones during the third quarter. Its Midnight electric air taxi will advance from hover to full wing-borne in the upcoming months. This will pave the way for Archer Aviation to start "for credit" testing with the FAA in the following 12 months.

Archer Aviation has partnered with different entities. For example, In UAE and India, it plans to launch air taxi services. The company has recently announced collaboration on interoperable charging and has gained access to BETA's leading electric aviation charging system and network. The company also received its first payment from the United States Air Force regarding its recently announced contracts. The contracts are valued at approximately $142 million.

Valuation

If we look at the company's financial ratios, they present a mixed picture. ACHR's Price Book Ratio P/B is relatively low at 0.92. This could suggest that the ACHR stock is undervalued, assuming the company's assets are sound and prospects positive. However, ACHR has a negative Enterprise Value to EBITDA ratio of -4.04. This would typically require a more in-depth analysis as it might indicate negative earnings before interest, taxes, depreciation, amortization, or an enterprise value generally low compared to cash holdings.

ACHR shows exceptional strength if we look at its liquidity. The Current Ratio is at 10.23, the Quick Ratio mirrors this figure, and the Cash Ratio is at 10.02, indicating that ACHR has a solid capacity to fulfill its short-term obligations. These ratios show that the company has enough liquid assets, which shows that it is financially stable and has enough cash to meet its financial obligations.

However, the profitability ratios contrast, with the Return on Assets at -47.28, Return on Equity at -52.23, and Return on Invested Capital at -52.36. If we look at these negative values, it raises concerns regarding the company's ability to profitably utilize its resources. It can also indicate that the company is facing some operational challenges.

ACHR's capital structure shows a high reliance on debt financing. The Total Debt to Total Equity ratio stands at a substantial 4.50, suggesting a high level of leverage. This is corroborated by the Total Debt to Total Capital ratio of 4.31 and the Total Debt to Total Assets ratio of 3.87. Moreover, the Long-Term Debt to Equity and Long-Term Debt to Total Capital ratios are at 1.86 and 1.78, respectively, which, while lower than the total debt ratios, still suggest that long-term debt is a significant factor in the company's capital structure.

Finally, the critical efficiency metric for any company is the efficiency ratio of income per employee, which is at -$56,936 and shows a lack of income generation per employee.

In summary, these financial ratios for the ACHR stock suggest that the company has a strong liquidity position but faces operational and profitability challenges. It is understandable that ACHR is a pre-revenue company and solely relies on the investors' funds to carry out operations. Its high leverage indicates strategic financial planning, as the company doesn't want to dilute most of its equity before registering its first revenue. These valuation metrics show that the market may be undervaluing the company, but on the other hand, this undervaluation could be a reflection of underlying financial or operational issues.

Risks

Like any other eVTOL company, it has certain risks. A rival company could challenge it, take its market share, and dominate it. Any technical hazard could significantly harm its brand image and investors' trust.

Hurdles in the regulations could potentially harm its operations. They must overcome these hurdles to make it commercially available to the public and make the company profitable.

Another operational risk would be the funds and infrastructure needed to establish vertiports. The charging stations are also a great challenge for the company, whether it will collaborate with the other companies in the industry or follow Tesla's model and make its own charging stations. This could ultimately increase its cost.

Public acceptance is another factor that could affect its sustenance. This will need strong marketing campaigns to convince the general populace to use it more regularly, increasing its marketing cost.

Conclusion

In conclusion, the ACHR stock is a potential buy as the company has a strong growth outlook. Its deals in the pipeline reflect that the company is poised to reap the value as soon as eVTOL aircraft are open to public use. Its Midnight aircraft has secured many deals, gaining the trust of the relevant industries.

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