The emerging aviation company is charting an ambitious course for the future of transportation.
It has been decades since the global landscape witnessed a genuine innovation in physical transportation. While companies like Uber Technologies and Lyft, along with Waymo, have revolutionized our interaction with traditional vehicles, the fundamental design of these vehicles remains largely unchanged, whether they are electric or powered by internal combustion engines. The introduction of commercial airplanes occurred shortly after World War II, and Japan’s high-speed rail systems were pioneered in the 1960s, marking significant milestones in transportation history.
This status quo is poised to transform with the advent of electric air taxis and innovative companies such as Archer Aviation (ACHR -2.55%). This forward-thinking company is developing electric vertical takeoff and landing vehicles (eVTOLs) and envisions establishing a network of air taxis aimed at revolutionizing urban transit. However, in recent months, Archer’s stock has seen a decline, dipping below its original SPAC IPO price of $10.
Is this the right moment for investors to consider purchasing shares in this groundbreaking transportation innovator before its value potentially surges?
Creating Efficient Air Taxi Networks for Urban Mobility
In its developmental phase, Archer Aviation is strategizing to implement point-to-point air taxi networks utilizing its electric vehicle, known as the Midnight. Envision this service as comparable to helicopter landing zones situated throughout a city, enabling passengers to circumvent traffic and travel swiftly from one location to another. The company has ambitious plans for launching air taxi services in major cities like New York, Los Angeles, and Abu Dhabi in the coming years. Notably, in Los Angeles, Archer is racing against time to be operational in anticipation of the 2028 Summer Olympics.
To realize this vision, the Midnight aircraft requires clearance from the Federal Aviation Administration (FAA), which has been a lengthy process due to the extensive inspections needed for this new mode of transportation. Given that the Midnight will operate over both residential and commercial areas, ensuring its safety and reliability is paramount.
Management at Archer Aviation is optimistic about receiving FAA certification soon, yet the timeline remains uncertain, and potential delays could pose significant challenges. This regulatory hurdle represents a critical juncture in Archer Aviation’s growth trajectory that investors must monitor closely.
Upon receiving certification, the Midnight will be primed to ramp up production and activate these air taxi networks, paving the way for revenue generation.
Image source: Getty Images.
Understanding the Significant Financial Challenges of Archer Aviation
Establishing an entirely new mode of transportation comes with substantial expenses, which is evident from the financial records of Archer Aviation. The company is in the process of expanding its manufacturing facilities across the United States, with a long-term goal of achieving a production rate of 50 Midnight aircraft annually.
Currently, with no revenue generated, Archer is facing a significant cash burn of $477.5 million in free cash flow each year. To sustain operations from the startup phase through to certification and the eventual launch of operational taxi networks, the company has secured substantial funding, including over $1 billion this year alone. As of the latest earnings report, Archer boasts $1.7 billion in liquidity, which provides a financial cushion for several years at the current burn rate.
To achieve financial sustainability, Archer Aviation must significantly increase its annual production of the Midnight aircraft. Presently, it holds orders for hundreds of these aircraft, with an estimated average selling price of $5 million each. Selling 50 units per year would yield $250 million in revenue, which is insufficient to cover the current cash burn rate.
Additional revenue may arise from operating the taxi networks, although the specifics of revenue sharing with aviation partners like United Airlines remain unclear. What is evident, however, is that Archer Aviation must reach a critical manufacturing scale to attain profitability.
ACHR Free Cash Flow data by YCharts
Should Investors Consider Buying Archer Aviation Stock?
Archer Aviation presents a promising technological advancement in the aviation sector. Nonetheless, this potential does not automatically translate into a favorable investment opportunity at a market capitalization of $5.9 billion. The company is currently experiencing significant cash outflows and has yet to generate any revenue, compounded by the risks associated with the FAA potentially not granting full approval for the new air taxi products if they fail to meet safety inspection standards.
Even if Archer realizes its objective of producing 50 aircraft annually, profitability may still be elusive. Manufacturing is typically a low-margin industry, which implies that to achieve sufficient profits and cash flow justifying a market cap near $6 billion, Archer will likely need to sell hundreds of aircraft on an annual basis. This scenario appears to be several years in the future, if it materializes at all.
Given these factors, it may be prudent for investors to refrain from purchasing Archer Aviation stock, even though it is currently trading below $10 per share.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Uber Technologies. The Motley Fool recommends Lyft. The Motley Fool has a disclosure policy.
