Archer Aviation Stock Is Down 30% in the Past Month: Should You Buy the Dip?

When a promising growth stock falls suddenly in price, it can be an opportunity for investors to swoop in and secure a great deal. But that isn't always the case. In some situations, it may simply be an overpriced stock that's come back down to reality.

Archer Aviation's (NYSE: ACHR) stock has been on a 30% decline in just the past month, and figuring out whether it's in the midst of a larger crash or if it's become a steal of a deal may not be so easy. The company is an early leader in the electric vertical take-off and landing (eVTOL) market, hoping to commence commercial operations in the near future. Here's what you need to know before deciding to invest in the stock.

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It has made progress on certification, but operations may not begin until next year, or later

For Archer to offer air taxi services, which is what many growth investors are counting on, its Midnight Aircraft needs to first obtain certification from the Federal Aviation Administration (FAA). The company hopes to get the green light by next year, but that is not a guarantee. It says that while it has continued to test its piloted aircraft, the government shutdown has nonetheless affected the FAA. Thus, even launching operations in 2026 might be a best-case scenario for Archer.

For investors, this means that it may take even longer to see what its operations look like and how much revenue it's taking in, and how much demand there is for air taxi services. Those are all the big question marks around Archer right now, and whether its $5.5 billion market cap is justifiable. While the valuation has come down recently, it's still difficult to gauge how strong its business model will be and what it should be worth today.

The two figures that are most important for investors to focus on right now

If you're looking at Archer Aviation as a potential investment, the one thing you have to be cognizant of is the dilution risk. This is going to be a cash-burning business for the foreseeable future.

The two numbers that can help assess that risk are the company's current assets, which include cash and short-term investments, and its rate of cash burn. The higher the cash burn is in relation to Archer's current assets, the more likely it is that it'll need to raise funds and do a stock offering in the near future.

Over the past nine months, Archer has used up $304 million in cash from its day-to-day operating activities, which is up from $264 million over the same period a year ago. Its current assets totaled a little less than $1.7 billion (as of Sept. 30), so there is a bit of a buffer here. The current assets are primarily made up of short-term investments and cash. Net income will be more important once the company is operational and generating revenue from its air taxi business. But for now, cash flow is what will be key for investors to focus on.

The good news is that the company looks to be well-funded right now. However, one thing to consider is that as Archer ramps up production, its cash burn could accelerate. Plus, investors should watch for acquisitions. Archer recently announced the purchase of Hawthorne Municipal Airport in Los Angeles for $126 million. It plans to use the airport as a hub for its air taxi business. To help fund the move, it announced a stock offering of $650 million, which will help fund that acquisition and enable it to also pursue other growth opportunities down the road.

Is Archer Aviation stock right for your portfolio?

Archer is one of the early leaders in the eVTOL space. But there is competition as well, from Joby Aviation and BETA Technologies, which recently went public.

The reality is that it's going to be a volatile road ahead for the eVTOL industry. Between obtaining the necessary certification, securing the necessary infrastructure, and creating a business model where the price is low enough for the consumer and high enough for the company to be on a path to profitability, there's plenty of uncertainty here. That's why I think a wait-and-see approach makes sense for most investors at this point.

While Archer's stock has fallen heavily in value, potentially due to concerns in the market about its valuation, there is no assurance whatsoever that it can't still go lower from here. If you can afford to make a small investment and are OK with the risk involved, Archer may be worth taking a chance on, given its growth potential. But at the very least, you'll want to brace for some significant volatility ahead.

David Jagielski 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.