Archer Aviation (NYSE:ACHR) is an aviation startup that is working to deploy electric vertical take-off and landing vehicles for uses ranging from air taxis to defense applications.
Shares of Archer Aviation have been rising rapidly in the last year, with trailing 12-month gains now topping 175 percent. Share prices have kept rising recently, despite the fact that the business itself still hasn’t been able to generate significant revenue from its technology.
Why is Archer Aviation going up, and can investors still find upside in the stock at today’s prices?
What’s Sending Archer Shares Skyward?
To fully understand Archer’s massive price increase over the last year, we have to dig into the expectations around its business and around the kind of aircraft it builds in general. Although they haven’t seen much real-world use yet, air taxis could, when deployed widely, prove to be a revolutionary improvement in transportation.
By some estimates, the global air taxi market could grow to over $60 billion in the next decade, achieving a compounded annual growth rate of nearly 30 percent during that time.
Archer Aviation is among a small handful of businesses that could be uniquely positioned to take an early lead in this market. Archer has already developed an electric aircraft it calls the Midnight and is in the process of running piloted test flights as it moves closer to regulatory approval.
Archer hopes to have its air taxis in full service within just a handful of years, even partnering with the Olympic Games to provide air taxi service at the 2028 games in Los Angeles.
Archer has also benefited from an executive order aimed at promoting the development of air taxis and other eVTOL applications in the United States. In the wake of that order, Archer was able to raise an additional $850 million of funding due to the promise of direct government support for the industry.
Given that Archer is already working on electric aircraft for defense applications, the government’s decision to promote the eVTOL industry could prove critical in accelerating development and putting Archer on a path to consistent revenues.
In recent weeks, the stock has also benefited from two general tailwinds, though it’s worth noting that neither of these is directly related to the business itself. To begin with, ACHR shares gained on news that one of its close competitors, Joby Aviation (NYSE:JOBY), would increase its production this year. The market took this as good news for the electronic aircraft industry as a whole, rewarding Archer shares with a gain of more than 10 percent the day the news came out.
Archer also appears to be benefiting from a general increase in the prices of speculative stocks with high growth potential. Shares of such businesses have surged recently, in part due to expectations that the Federal Reserve will cut its baseline interest rates later this year in response to tamer-than-expected inflation.
While this could put ACHR and other high-growth stocks at risk of falling if the Fed proves more hawkish than the market is expecting, these stocks are currently benefiting from the perception of easier monetary policy within the next few months.
Cumulatively, these trends have allowed shares of ACHR to maintain a fairly incredible level of upward momentum. On a trailing 3-month and 1-month basis, Archer Aviation has returned 83.8 percent and 30.3 percent, respectively. Like most stocks, ACHR dipped significantly in early April when the Trump administration’s new tariff policy was introduced, but the stock has since regained all the ground it lost and moved well above its pre-April highs.
Archer Aviation’s Valuation Problem
While there may be quite a bit of promise in Archer Aviation, the stock has a fairly notable valuation problem. The business currently commands a market cap of $7.3 billion, more than 7 times its book value.
This valuation comes despite the fact that the business isn’t generating appreciable revenues, let alone free cash flow or earnings. Given how young the business is and the fact that it’s still highly speculative, this puts ACHR at very real risk of being substantially overvalued.
Indeed, Archer Aviation shares have even overshot the expectations of the fairly bullish analysts who cover it. The consensus price target for ACHR is $11.94, more than 10 percent below the most recent price of $13.29. This is unsurprising considering how much shares have risen in the last 12 months, but it does illustrate how much Archer Aviation has overshot even fairly optimistic views of its potential value.
Is ACHR Worth the Risk?
On the surface, there’s a decent argument to be made for Archer Aviation as a business. The startup has managed to create a cutting-edge eVTOL that could put it in a prime position to benefit from the rise of air taxis as part of the transportation mix. Archer has also made solid progress in safety testing and regulatory approval, putting it in a good spot to take an early lead in what could be a very fast-growing industry through the next 10 years and likely beyond.
The problem, however, comes in the form of ACHR’s sky-high valuation. With substantial revenues yet to materialize, it’s extremely difficult to predict when the business could become profitable.
As such, Archer Aviation appears very speculative, especially considering the fact that the market it hopes to become a leader in barely exists as of right now. This makes it difficult to predict with any accuracy not only how the business itself will fare but also what the market environment around it will look like.
At the moment, Archer looks like it could be a promising startup to watch as its business develops. Until more clarity around its revenues and the market for eVTOLs in general becomes available, though, ACHR is likely too speculative for all but very risk-tolerant investors.
Moreover, even for investors who are comfortable with the uncertainties, Archer Aviation’s price could already have climbed so high that buying it now may be an unattractive option. Taking all of this into account, Archer Aviation could be a good hold at the moment, but there may not be a strong enough argument in favor of buying the stock.
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.