By Archer Aviation (ACHR) stock price has imploded in the past few years, as concerns about dilution and the overall electric vertical take-off and landing (eVTOL) industry continued. It has crashed from a record high of $18.55 in 2021 to $3.10. At the same time, the number of outstanding shares have risen from over 50 million to almost 300 million.
Archer Aviation is not the only eVTOL company in trouble. Lilium stock has dropped from $15.5 in 2021 to $0.6665 while Joby Aviation has moved from $17 to $4.77.
These stocks have all dropped mostly for similar reasons. They are all burning cash, are in an unproven market, and are raising substantial sums of money from investors.
Analysts are getting optimistic about ACHR
Despite the doom and gloom in the eVTOL industry, some analysts are starting to sound upbeat about Archer Aviation, one of the biggest companies in the industry. In a recent note, analysts at Cantor Fitzgerald, maintained their optimistic view and their price target of $10. This means that they expect the stock to rise by over 228%.
At the same time, analysts at HC Wainwright initiated their coverage with a $12.50 target. In their note, the analysts noted that the company has made a lot of progress in its testing and sales, meaning that it could take off in the coming years. Analysts at Benchmark and JP Morgan are also upbeat about Archer.
The average Archer Aviation stock target by analysts is $9.50, meaning that it needs to rise by over 250% from the current level.
Archer Aviation has made progress
I believe that Archer Aviation – and Joby Aviation – has made substantial progress in its development ahead of commercialization.
The most important, in my view, has been its partnership with Stellantis, the parent company of Jeep and Chrysler. As part of its deal, Stellantis has acquired a substantial stake in the company and offered its manufacturing expertise.
Most recently, Stellantis invested about $50 million in Archer, bringing its total investment to $300 million.
This deal will see Stellantis handle the manufacturing of its aircraft as it focuses on research and development (R&D). In this, Stellantis will fund labor and capital expenditures in exchange for quarterly share awards.
Altogether, Archer Aviation will become an asset-light company focusing on R&D and sales, at least initially.
Dilution is a key risk for investors
As I have written before, one of the biggest risks that Archer Aviation faces is dilution, where the company introduces new shares.
Archer Aviation has continued to raise cash by selling new shares in the last few years. It raised $230 million in the second quarter, bringing its total cash on its balance sheet to over $500 million.
The risk is that the company will continue to raise more money ahead and after its commercialization progress. In the last quarter, it had a net loss of over $106 million, bringing its five-quarter losses to over $354 million.
Archer Aviation’s unlevered free cash outflow stood at over $300 million in this period. As such, with this trend expected to continue, there is a risk that it will continue to dilute existing shareholders. Its deal with Stellantis is also dilutive since the company will pay it using newly issued shares.
Risk/reward analysis
Archer Aviation exists in a high-risk/reward industry that has not been tested yet. On paper, the idea of eVTOL makes sense as cities continues getting bigger and desire for a more hybrid transportation network rise. A research by Markets and Markets estimated that the industry will be worth over $30 billion by 2030, up from less than $2 billion today.
This explains why Archer Aviation has received so many pre-orders. In the last financial results, the company said that it had a big backlog of over $6 billion from companies like United Airlines and Future Flight Global. That order book is about 6 times the company’s current market cap.
Additionally, Archer Aviation has made substantial progress in its testing process. Its Midnight aircraft has completed its first transition, which is notable because of its 6,500-pound weight. It has also received two crucial certifications, one for its airworthiness and the other one that allows it to operate an airline in the US.
Therefore, if the eVTOL industry does well, chances are that Archer Aviation – and Joby Aviation – are in a pole position. These firms have a chance to become the Teslas of this new industry.
As such, it makes some sense to invest in Archer Aviation, especially for investors with a long-term horizon.
However, these investors should be aware of several important risks. As noted, there is the issue with dilution, which will be here for a long time.
There is also the risk that the industry will not be as big as what analysts expect. In the past, we have seen some flashy papers on new industries, only for them to implode. Some of the most notable industries are cannabis and 3D printing.
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