ACHR - Archer Aviation: Stock Remains Cheap At This Level

2023-07-13 12:29:09 ET

Summary

• I recommend a buy rating due to ACHR's promising business prospects in the growing eVTOL aircraft market.
• ACHR is on track to meet its certification timeline, with 15 of 18 SSCPs submitted and the first Midnight aircraft assembled; flight testing is set to begin in 2H23.
• The risk is ACHR weak balance sheet and depleting cash reserves.

Overview

My recommendation for Archer Aviation (ACHR) is a buy rating, as I expect the market to continuously recognize its business prospects as it gets closer to achieving positive revenue.

Note that I previously rated buy rating for ACHR due to the cheap valuation that it was trading at. If ACHR is successful in putting its strategy into action through coordinated efforts with influential allies, it stands to gain significantly, and the stock will worth a lot more.

Business

ACHR is creating an electric vertical takeoff and landing [eVTOL] aircraft for UAM that can travel 60 miles at 150 mph with minimal noise and zero emissions.

Industry

Fortune Business Insights projects a CAGR of 23.13% for the period 2023-2028 - the global eVTOL aircraft market growing from an estimated $1.11 billion in 2020 to $23.21 billion by 2028. In my opinion, the growing traffic problems in major cities all over the world are a key driver for the interest in eVTOL aircraft. The logic is simple, it takes a long time to build a new road infrastructure, especially in city urban areas that are already well populated. As such, the next best alternative is to utilize the airspace. As they take advantage of the vertical dimension to allow for point-to-point travel without the use of conventional runways or roads, eVTOL aircraft have the potential to reduce traffic congestion.

The large market has attracted multiple players and startups into the field such as: Lilium (LILM), Joby Aviation (JOBY), Kitty Hawk, Volocopter, Bell Textron, Beta Technologies, and many others.

Investment highlights

With 15 of 18 SSCPs (1Q23 earnings call) already submitted and final assembly of the first Midnight aircraft completed, ACHR appears to be on track to meet its certification timeline. Extensive flight testing of the aircraft will begin in 2H23. It's promising that management is sticking to its guns about starting piloted testing with more conforming aircraft in early 2024 in order to support its for-credit testing process with the FAA. Important parts like battery packs and modules have either undergone or finished extensive testing that meets or exceeds a number of FAA testing criteria (1Q23 earnings call). I don't anticipate any major delays in this process as long as ACHR keeps communicating closely with the FAA.

Financials highlights

As ACHR is still in the R&D phase, attention should be focused on its long-term profile. After reaching a critical mass, management estimates that ACHR's direct sales will generate a gross margin of around 50% (1Q23 earnings call). Since ACHR's current United (UAL) contract allows for such profit margins in pricing, I find this to be plausible. The ACHR UAM operator segment, on the other hand, despite the high upfront costs of insurance, pilots, and funding, should be a sustainable and rapidly expanding business.

This 50% gross margin is impressive when compared to other aircraft manufacturers like Boeing (BA), which has a gross margin profile in the mid to high teens during normal periods.

However, with only $450 million in cash, ACHR's balance sheet is not particularly strong. Because EBITDA is -$382 million over the LTM, ACHR only has 1+ years of cash runway. As the debt market is currently unfavorable, I expect ACHR to raise capital, most likely in the form of equity.

Valuation

ACHR should be valued at $239, according to my model, which is based on management's long-term guidance, representing a significant share price upside.

Because ACHR and its peers (JOBY, LILM) are all still in the R&D phase, I valued ACHR by comparing it to the market multiple over the long term. Given the margin profile and likelihood of continued growth beyond FY30, I believe ACHR should trade at or near the S&P forward EBITDA multiple (13x today).

Risk

As it works to develop new aircraft and technologies, ACHR is quickly depleting its cash reserves, increasing the likelihood that it will need additional funding in the form of equity or debt. Both of these could affect the price of ACHR stock.

The biggest risk is ACHR fails to continue through with its R&D. This could come in the form of product failure, which will be a death knell to the bull thesis as it suggests the business is no longer viable

Conclusion

I maintain my buy rating for ACHR as I believe the stock remains cheap at its current level. ACHR is creating an eVTOL aircraft for UAM, which is a growing market with significant potential. With most of the required certifications already submitted and progress made on the aircraft assembly, ACHR appears on track to meet its milestones. However, depleting cash reserves and the need for additional funding pose risks.

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