EVTL - Archer Aviation Has Sky-High Long-Term Potential But Their Vision Will Take Time

Summary

• Archer Aviation has very few catalysts set for the next 2-3 quarters and therefore the stock could underperform the market in 2023.
• The company is a leader in what could be a revolutionary industry and therefore holds significant long-term potential.
• Therefore, we believe the stock is a hold until later this year when their vision is expected to become a more concrete reality.

Archer's Vision Is Still Years Out

Archer Aviation ( ACHR ), a leader in the eVTOL revolution, has had plenty of promising news over their first year of trading and since we last covered the stock . The company has received big name investments from groups such as Stellantis ( STLA ) and future orders (Figure 1) from aviation leaders such as United Airlines ( UAL ). Despite this, the market has been valuating Archer Aviation at a large discount compared to its peers, such as Joby Aviation ( JOBY ), and this is likely to close as the industry ramps up in coming years. Archer regards themselves as the first mover in the space and has already secured partnerships with United as aforementioned, which gives them a distinct first-mover advantage. While there are regulatory risks such as FAA compliance that will impede stock movement for the next couple of years, we believe that the potential is there, and that Archer will be able to secure the necessary approvals to reach their goals. Therefore, we recommend holding Archer stock at its current levels, but believe the stock could be a strong buy in late 2023 early 2024 on any further pullbacks.

Figure 1. Archer has been a proven leader in what could be a massive industry ($9 trillion TAM by 2050) securing investments to make their dream a reality

With most of the engineering expected to be worked out by the end of 2023 and FAA compliance to hopefully be obtained by the end of 2024, revenue could be coming in as early as 2025 with broader commercialization ramping up to more respectable figures sometime between 2026-2028. In our opinion, with few catalysts until the second half of the year, the stock is a hold as there are likely many cheaper names that will deliver stronger returns than Archer in 2023. Look to revisit ACHR towards the end of this year or early next year as we expect momentum to begin to build around the industry as test flights begin to take place.

Current Valuation

As of late February, Archer Aviation's stock is valued at around $2.75 per share. This gives the company a market capitalization of approximately $650 million, a little rich for little to no profits or revenue to be expected for another 2-3 years. Archer Aviation is a leader in the electric vertical takeoff and landing (eVTOL) space and therefore does deserve to trade a premium to most peers (Figure 2). Current undervaluation is further justified by a 1.2x price to book value, around 50% below the average of competitors.

Figure 2. Competitors' valuations from Joby Aviation and Vertical Aerospace put Archer in the middle of the pack purely from a market cap perspective

Analysts' projections predict Archer to become cheap by early 2028 with strong growth expected right out of the gate if compliance is achieved (Figure 3). We believe the market will not produce significant gains in the eVTOL sector until FAA compliance is within a short-term horizon, making our most favorable time for entry still as much as a year away. Until then, all investors will see Archer's stock as is a cash burning vehicle. Once test flights are underway and a concrete product is in front of the market, one could speculate the industry could very well balloon, as we have seen EV & AI names do in recent years.

Figure 3. Analysts project well over 50% Revenue gains year over year through the back half of the decade if all goes well for Archer

Risks

First and foremost regarding downside risk, Archer Aviation is a start-up company and as such, it is subject to all the risks that any other start-up company faces. These risks include the potential for financial losses, failure to meet customer expectations, and difficulty competing against established companies, in their case traditional airlines. Another risk to consider is that Archer Aviation's products are not yet commercially available. The company is still in the process of developing, engineering, and testing their technology. Once compliance is gained, the level of consumer interest will then become more apparent. Archer Aviation has very little debt and around $600 million in cash on hand. Short-term cash availability is not a huge risk, but one could foresee this becoming an issue down the road when commercialization begins and therefore should be closely monitored quarter to quarter. With the only likely news to come through mid-2023 to be updated cash burn and engineering progress updates, ACHR could trend downward until positive catalysts are released. Potential to push down towards 52-week lows are there, and therefore short-term downside risk likely outweighs upside at current prices.

Overall Investment Summary

Overall, Archer Aviation's stock is trading just above all-time lows from this past year. However, the company could be the next big industry to take off over the next half decade, or potentially sooner. Therefore, Archer Aviation should be considered for a small portion within one's portfolio towards the back half of the year for patient, speculative investors. The stock at current prices is a hold at best from a short-term perspective. The company is well-positioned to capitalize on the expected growing demand for electric vertical takeoff and landing vehicles that may come on the horizon. They have investors and demand to get them through their roadmap to commercialization, and the stock will be cheap if they are successful in their presented timeframe. Lack of catalysts this year could cause the stock to drag, but look for this industry to become the next big thing in 2024-2025 as the technology advances.

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