Time to Buy the Dip on Archer Aviation Stock Below $10?

Key Points

• Shares of the "flying taxi" maker are now trading below $10, their IPO price.

• Archer is working toward building its air taxi network, but is burning a lot of cash.

• Continued uncertainty around its future financials makes this a risky stock.

• 10 stocks we like better than Archer Aviation ›

It has been decades since the world saw a true physical transportation innovation. Sure, Uber Technologies and Lyft -- and now Waymo -- have innovated in how we interact with cars, but people are still riding around in the same old type of vehicle (whether electric or internal combustion engine). Commercial planes were introduced after World War II, and the high-speed rail networks of Japan were actually invented in the 1960s.

This may all change with electric air taxis and companies like Archer Aviation (NYSE: ACHR). The upstart company is building electric vertical takeoff and landing vehicles (eVTOLs) and plans to build an air taxi network to disrupt urban travel. In recent months, its stock has begun to dip, falling below its SPAC IPO price of $10.

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Does all this mean investors should buy the dip on this transportation disruptor before it goes parabolic?

Developing air taxi networks

In the early stages of development, Archer Aviation is planning to host point-to-point air taxi networks with its electric taxi vehicle called the Midnight. Think of the service as similar to helicopter pads in different areas across a city, allowing customers to bypass traffic and quickly get from point A to point B. Plans call for air taxi networks in cities such as New York, Los Angeles, and Abu Dhabi within the next few years. In Los Angeles, the company is racing to be ready for the 2028 Summer Olympics.

To get there, the Midnight aircraft still needs certification from the Federal Aviation Administration (FAA), which is taking a long time to inspect this new type of transportation vehicle. Midnight aircraft will be flying above residential and commercial areas in cities, so they need to be extremely safe and reliable.

Archer Aviation management is hoping the vehicles get fully certified by the FAA shortly, but it is unclear what the exact timeline will be or if there will be any hiccups along the way. It is a huge roadblock in Archer Aviation's growth plans that investors should track closely.

Once the Midnight is certified, it will be ready to start scaling up production and getting these air taxi networks operational (and making money).

Image source: Getty Images.

Huge cash burn, necessary scale

Building out an entirely new form of transportation is expensive, which you can see from Archer Aviation's financials. The company is scaling up manufacturing facilities around the United States, with plans to eventually hit a rate of 50 Midnight aircraft sold each year.

With zero revenue generated today, Archer is burning $477.5 million in free cash flow a year. In order to bridge the gap from start-up to certification and eventually operational taxi networks, the company has raised a lot of funds, including over $1 billion this year. It has $1.7 billion in liquidity as of the last earnings report, giving it many years of runway at its current burn rate.

In order to achieve profitability, Archer Aviation is going to need to scale up to many Midnight sales per year. It has current orders for hundreds of Midnights, with an estimated average price of $5 million each. Selling 50 of these a year would equate to $250 million in revenue, which does not cover the current burn rate.

There may be other revenue from operating the taxi networks as it is unclear exactly how revenue sharing will go with its aviation partners such as United Airlines, but what is clear is that Archer Aviation will need to reach manufacturing scale in order to generate a profit.

ACHR Free Cash Flow data by YCharts

Is Archer Aviation stock a buy?

Archer Aviation has a promising new technology on its hands. However, that does not mean the stock is necessarily a buy at a market cap of $5.9 billion. The company is burning a ton of cash and has zero revenue today, with risks that the FAA will not even fully approve the new air taxi products if they do not pass safety inspections.

If Archer achieves its goal of 50 aircraft produced a year, it may still not be profitable. Manufacturing is a low-margin business, so in order to generate enough profits and cash flow to warrant a market cap approaching $6 billion, Archer Aviation is going to need to likely sell hundreds of aircraft annually. That scenario is many years away, if it ever happens.

For these reasons, investors should avoid buying the dip on Archer Aviation stock, even though it is below $10 a share.

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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.