STLA - Archer Aviation: Invest Alongside The Big Investors

2023-10-22 05:52:48 ET

Summary

• Archer Aviation continues to receive large investments for its eVTOL aircraft, with Stellantis investing $70 million.
• Despite concerns raised by short reports, sophisticated investors like Stellantis and ARK Invest remain bullish on the eVTOL sector.
• At only $5, Archer Aviation has an attractive valuation considering the massive opportunity ahead in air taxi services.

While the business model of the air taxi business has been questioned, Archer Aviation ( ACHR ) continues to grab investments from large partners. The eVTOL company continues to make substantial progress towards aircraft certification and service launch by 2025. My investment thesis remains ultra Bullish on the stock trading at only $5.

More Big Investments

Archer Aviation is building a new aircraft, so naturally the company will need a lot of capital to build a machine in volumes costing upwards of $5 million each. The good news is that large investment partners are lining up to hand the company money, including the latest purchase from Stellantis ( STLA ) of 12.3 million shares at $5.68 per share for an investment of ~$70 million.

The auto manufacturer is partnering with Archer Aviation on manufacturing the eVTOLs in Georgia. Stellantis now owns 31 million shares of Archer Aviation with a valuation of $155 million.

The news is very promising following the Grizzly Research short report on Archer Aviation and a further short report by Kerrisdale Capital on peer Joby Aviation ( JOBY ) with similar concerns. Sophisticated investors like Stellantis and ARK Invest ( ARKK ) continue to load up on shares while the shorts spread fear providing even further indication the business models are solid. These firms have the industry experience and analyst assets to verify the veracity of the short claims, yet they continue to invest in the eVTOL sector.

Business Model

Archer Aviation is building an eVTOL with a range of 100 miles and speeds of up to 150 mph with a goal of rapid 20 to 50 mile trips in urban areas. The Midnight aircraft is currently in the certification process with an expected approval in 2024 or early 2025.

Morgan Stanley predicted the urban air mobility market would reach $29 billion by 2030 and top $1 trillion in 2040. Archer Aviation plans to pursue multiple paths of monetizing the aircraft: aircraft sales to operators like United Airlines ( UAL ) and an air taxi business.

Archer Aviation selling aircraft is straightforward. United Airlines has agreed to purchase up to $1.5 billion worth of aircraft at a price of $5 million each. The airline has already placed a $10 million deposit on the first 100 aircraft, though Grizzly Research correctly points out Archer gave United Airlines basically free warrants to sign the deal.

The more complicated business is the air taxi service. The ride sharing business will provide a recurring revenue stream, but the business is unproven at a large scale and eVTOLs are entirely new aircraft.

Archer Aviation provides this general overview of the business suggesting the company intends to replace ride share cars with simple trips from an urban area to an airport or any other high traffic location. The company forecasts a reduced trip time allowing for more trips per day than a ride share car vastly boosting revenues.

Investors are right to question how an aircraft costing $5 million with a highly paid pilot can reduce the costs per mile to only approximately double the amount of a $20K car with cheap labor. The big key is the plan to charge for 4 seats while a ride share service only charges per trip.

Archer Aviation originally forecast a single aircraft generating $2.4 million in annual revenues from 25 trips per day. The service would have annual costs of $1.4 million leaving a rather healthy $1.1 million annual profit.

A big key to the success of the operations is the ability to sell up to 4 tickets per trip. The service would be vastly less profitable with only 2 tickets sold generating ~$200 in revenues at a cost of $100 each seat versus $400 with 4 seats sold, which is why the annual revenues jumps from $130K per ride share car versus $2.4 million per aircraft.

The revenue breaks down to $263 per trip, or the equivalent of 2.6 tickets sold per flight. Due to inflation, Archer Aviation might actually boost ticket costs in the future when service actually launches in Los Angeles in 2025.

The big part of the Kerrisdale short case against Joby Aviation was the focus on the costs per mile. The investment firm estimates the full cost of a flight is closer to $15 to $20 per mile, though a lot of the forecasted extra costs are due to a difference of opinion on battery replacement costs and inflation over the last couple of years.

One of the biggest issues with the presentations provided by Archer Aviation is general confusion on the definition of "seat-mile" and cost versus price. The company lists costs per mile as a $1.50 per mile for ride share versus $3.30 per seat-mile for the air taxi service.

The actual costs forecast by management amount to ~$6.20 per mile to reach the $1.4 million annual cost. The amounts on the presentation appear the cost for passengers, not the cost to operator the service.

Passengers would only pay $82.50 for the normal flight of 25 miles, though these prices appear very low compared to current market reality. Blade Air Mobility ( BLDE ) currently charges at least $195 per seat to fly from Manhattan to the NYC airports.

Kerrisdale Capital definitely comes up to a higher cost, but the research doesn't appear to factor in the concept of seat-miles where these costs are spread out across multiple seats. The airlines regularly provide costs based on revenue per seat miles (RSMs) and available seat miles (ASMs).

Due to high inflation, Archer Aviation and Joby could easily push ticket prices higher to cover additional costs since the business models were originally outlined a couple of years ago. According to data from YipitData provided by Forbes , US ride share fares rose 41% between Q3'19 and Q3'22. When a ticket to Disneyland on high demand days has jumped to $194, Archer Aviation likely has more pricing flexibility to charge far higher ticket prices.

While the actual costs to operate an air taxi service are probably hidden somewhere between the costs estimated by Archer Aviation and the amounts predicted by Kerrisdale, the service should have an easy ability to hike prices.

Takeaway

The key investor takeaway is that the stock has a market cap of only $1.4 billion with a market opportunity quickly jumping into the billions. Investors should continue investing alongside the large investors buying Archer Aviation, at higher prices in some cases.

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