The aviation upstart is trying to disrupt the transportation industry.
Archer Aviation (ACHR 1.44%) has soared 22% in the last month. Investors are getting increasingly excited about high-growth companies with the Federal Reserve lowering interest rates and the S&P 500 taking off to new all-time highs seemingly every day. The stock went public through a special purpose acquisition company (SPAC) in 2021 and has since floundered.
Now, it is starting to mount a comeback. At a measly share price of $3.92, is Archer Aviation a can’t-miss opportunity for the next bull market? Let’s take a look at this potential transportation disruptor and see if it belongs in your stock portfolio today.
Innovation in vertical takeoff and landing
Nobody likes sitting in traffic. Millions of hours are wasted every year in what feels like an insurmountable problem in some cities. Archer Aviation has a plan to help alleviate this pain with its electric vertical takeoff and landing (eVTOL) taxis. These are helicopter-like flying vehicles that can transport people across cities, avoiding traffic and hopefully getting fewer cars on the road.
On its website, Archer claims its new service — when available — will get customers from downtown Manhattan to the Newark Airport in less than 10 minutes. This trip usually takes an hour or longer. Saving time is a valuable service, and there are plenty of wealthy people who would pay a pretty penny to get access to Archer Aviation’s service.
But when will it be available? Archer Aviation does not fly any eVTOLs commercially right now. It has gone through testing with the Federal Aviation Administration (FAA), passing numerous tests on its way to commercial viability. According to its latest quarterly report, it plans on ramping up production of its eVTOL vehicles in 2025 but has sparse plans on when its taxi network will actually be available in cities.
From an investor’s point of view, this likely means it will be at least a few years before Archer Aviation gets commercially operational.
No revenue and mounting cash burn
Since Archer Aviation is not ready to operate its taxi network yet, it generates zero revenue. And, with a lot of spending on research, development, and manufacturing facilities, the company is losing a lot of money. Over the last 12 months, it has burned $380 million in free cash flow. It currently has over $500 million in cash and equivalents, which gives it barely a year of runway before running out of funds.
It will be a few years until Archer Aviation is generating a lick of revenue, let alone positive cash flow. Luckily, it does have a huge order book from various airlines around the world including the United Arab Emirates, the United States, and Japan. This order book is over $6 billion as of the end of last quarter. Archer Aviation doesn’t have a demand problem. It has regulatory approval, supply, and cash burn problems.
ACHR Shares Outstanding data by YCharts
The most important thing to watch
Archer Aviation is an early-stage stock with a lot of risks. That much is clear. If the company cannot get its taxi network operational, it will never be operational. This will hurt any shareholder of the stock. Most people will be watching this timeline closely, and I am sure that management will be discussing it every quarter with investors.
The one thing investors need to watch more closely is share dilution, the silent killer of stock returns. Since going public, Archer Aviation has continued to raise cash through stock offerings, and shares outstanding are now up a whopping 48% in the last few years. This will hurt earnings per share (EPS) and free cash flow per share over the long term, the key drivers of shareholder value.
With cash coming off the balance sheet quickly and just $500 million in reserve, more share dilution is likely coming. Even if Archer Aviation is able to get its air taxi network operational, shareholders will likely do poorly holding this stock given the extreme share dilution that is likely to occur. Stay far away from Archer Aviation stock — this is not a good growth stock to buy right now.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
