Vertical takeoff and landing (eVTOL) aircraft sound futuristic but that’s precisely what Archer Aviation (NYSE:ACHR) specializes in. Archer’s aircraft, called the Midnight, is a fast-charging vehicle designed to carry four passengers with luggage.
The aircraft is being touted for trips of 20-50 miles and can travel at a top air speed of up to 150 miles per hour but is this innovative aircraft manufacturer also a good investment?
Defense Contracts Set To Boost Top Line
To date, Archer Aviation hasn’t recorded substantial revenues. The company has, however, entered into a commercialization program with Abu Dhabi Aviation that may very well see its first revenue-generating aircraft deployed by the end of this year.
Management is hoping that this arrangement serves as a framework for other such partnerships, allowing it to quickly scale up the top line.
Like many electric aircraft startups, Archer is also banking on strong demand from the defense industry. Archer has partnered with Anduril Industries, a defense technology company, to supply electric aircraft for defense applications. It also has standing contracts with the US Air Force valued at up to $142 million, a sum that will likely be among its first significant revenue streams.
One very positive development Archer for Archer this year will be the construction of as many as 10 of its Midnight aircraft for use as a testing fleet. The construction of these aircraft will allow the company to set up its manufacturing for larger-scale production, potentially paving the way for larger numbers in the future.
Financially, Archer remains in fairly good shape with about $1 billion in liquidity, even after a net loss of $536.8 million last year. Though it will very likely need more capital to scale manufacturing and make progress toward widespread commercialization, Archer appears to have enough in its coffers to continue operating for the time being.
Archer Aviation’s Value Is a Puzzle
One of the difficulties of investing in Archer Aviation is the fact that the company has neither significant revenues nor earnings to base a valuation on. The stock’s price-to-book ratio, however, is currently 5.1, which could prove to be quite high for a company that isn’t even generating sales yet.
This lack of a clear basis for valuation may have contributed to the stock’s extremely high volatility over the past year. The 52-week range for ACHR runs from $2.82 to $12.48, showcasing just how much difficulty the market has had establishing a fair value range for the company.
This valuation problem also appears in analyst price forecasts, which run the gambit from a low of $4.50 to a high of $13.50. At the average price target of $11.39, the stock would gain just over 60 percent from its current price of $7.11. Investors may want to take this average with a grain of salt, as it’s the average of a fairly small group of analyst forecasts with very little consensus.
One fact that has worked in ACHR’s favor is strong interest from institutional investors. Over the last six months, institutions have purchased $3.6 billion in Archer Aviation shares. This puts about two-thirds of the company’s outstanding shares under institutional ownership.
Does Archer Aviation Have a Moat?
Another problem investors may have with Archer Aviation is its lack of a particularly strong moat. Many startups are currently working to develop the kind of small, electric aircraft Archer hopes to commercialize. Joby Aviation is another such startup that has been able to secure partnerships with the likes of Delta Airlines and Toyota.
Archer has struck a similar partnership with United Airlines to operate electric air taxis, but it’s not yet clear which of the two startups will be more successful.
It can’t be ignored that there are many different companies hoping to commercialize aircraft similar to those made by Archer and Joby. Lilium and Volocopter, for instance, are startups with similar ambitions. With the market for these aircraft still in its infancy, it’s extremely early to say which if any of these companies will ultimately emerge as the major player in the eVTOL space.
Is ACHR a Buy, Sell or Hold?
Although Archer could be promising from a technology perspective, there doesn’t seem to be a terribly strong argument in favor of buying the stock today.
With no existing revenues and a venture that is still in its extremely early stages, Archer Aviation appears to be an extremely speculative investment. Though those who are bullish on the future of small electric aircraft with vertical takeoff and landing capabilities may want to watch the stock, it’s probably not a good buy at the moment.
The company’s focus on early adopter foreign markets could also put it at some risk in light of rising trade tensions. The tariffs being put on by the Trump administration could be met with reciprocal tariffs in other markets, increasing the cost of Archer’s aircraft and potentially weakening its initial commercial rollout.
Overall, ACHR may be a good stock to sell at the moment. There simply appear to be too many unanswered questions right now about how large Archer’s revenues and eventual earnings could be, what sort of timeline they could appear on and whether the company will come out on top in the eVTOL race.
Though there’s plenty to like about the Midnight as an aircraft concept, stock in Archer Aviation is likely too risky for many investors to buy or own until some of these questions can be answered.
With all of that said, Archer is probably worth keeping an eye on. Despite its challenges, the company has carved out a place as an early eVTOL frontrunner. Once it can start delivering solid revenues and expanding its business, the company could well be worth consideration. The problem at the moment from an investment standpoint has little to do with the company’s technology and more to do with the fact that investors can’t be sure if or when it will begin producing positive earnings or cash flows.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
