Is Archer Aviation Stock a Buy Now?

Key Points

• The company's flagship aircraft, the Midnight, recently took its longest test flight yet.

• Archer boasts heavyweight partners and potential deals with the Defense Department.

• It has far more in cash and equivalents on its balance sheet than its closest competitor.

• 10 stocks we like better than Archer Aviation ›

Archer Aviation (NYSE: ACHR) is selling a big idea: small electric vertical take-off and landing (eVTOL) aircraft, or so-called "air taxis." These sleek, battery-powered aircraft promise to turn 45-minute crosstown commutes through busy metropolises into 10-minute rides above the traffic. It's an idea that has wings, but the company's first aircraft hasn't yet cleared all the regulatory hurdles required for it to be commercialized and carry paying passengers.

That leaves investors with a fundamental question: Is Archer on the cusp of leading a breakthrough transformation in urban air travel, or will a competitor such as Joby Aviation beat it to the punch? Although Archer's market cap of about $6 billion is only about half of Joby's $12.7 billion valuation, I think Archer is still the worthier investment today. Here's why.

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What does Archer Aviation do?

In a nutshell, Archer Aviation is developing flying taxis -- eVTOLs meant to shuttle people across congested cities. Its aircraft run entirely on electricity, which means lower emissions and less noise pollution than traditional small aircraft.

Its flagship bird is the Midnight, a five-seat, 12-rotored short-haul craft that can lift straight into the air and land the same way. Fun fact: Archer recently completed its longest piloted flight of a Midnight craft, flying 55 miles in about 31 minutes at speeds that reached above 126 mph.

Image source: Getty Images.

The flight, of course, was only a test, which is about where Archer Aviation stands today. It's currently in the pre-revenue stage as it awaits Federal Aviation Administration (FAA) approval for the Midnight to begin commercial flights. In the meantime, Archer will continue burning cash on these trials in its effort to demonstrate to regulators that its aircraft can safely carry paying customers.

Strategic partnerships are keeping Archer afloat

Speaking of "burning cash," what does Archer's balance sheet look like? Not bad from a cash perspective. At the end of June, the company had a cash position of $1.73 billion, up by about $700 million from the end of March and up a whopping $1.3 billion from a year prior. Thanks to continued capital support, Archer has now increased its cash and cash equivalents for at least four consecutive quarters, even as its R&D expenses have stayed relatively steady.

ACHR Cash and Short Term Investments (Quarterly) data by YCharts.

As the chart above shows, Archer's cash position is stronger than that of rival Joby Aviation. Even if one factors in the $250 million that Toyota is expected to contribute to Joby's war chest, Archer is still sitting on about half a billion dollars more.

That's significant, because it could take a while before either company is generating enough revenue to cover its costs. At Archer's current burn rate (about $400 million over the trailing 12 months), the company could keep operating for four to five years at its current spending levels before it would need to raise more money. Meanwhile, Joby's cash burn has been a bit higher (about $448 million over its last four reported quarters), which means it could stay afloat for about three years if it kept its loss rate the same.

Of course, that half-decade or so runway for Archer is purely theoretical. As testing and production of the Midnight ramp up, its cash burn will only accelerate, which means Archer will likely have to keep raising cash by selling fresh equity. It's no stranger to raising capital -- it brought in $850 million that way in June -- but if it has to sell more stock, that would dilute the positions of its shareholders. For now, Archer has a cash cushion. But its lack of revenue is something to watch closely, especially with FAA type certification for the Midnight not expected for a couple more years.

Is Archer Aviation a buy?

To be sure, those regulatory hurdles are just problems for Archer to solve, not reasons to dismiss it as a growth stock investment. Even though its cash flow is negative, it has several heavyweight partners, including United Airlines, Stellantis, and Boeing, that could keep it humming along as it pushes toward commercialization.

While commercializing its aircraft will be the surest sign of its long-term viability, Archer has a few near-term opportunities that could allow it to start generating revenue sooner. Defense contracts, for one, could become a lifeline. Since aircraft made for defense contracts don't have to pass through the usual FAA certification pipeline, Archer could start earning revenue today if it won such a contract. Considering that the White House recently prioritized eVTOL technology as a part of its national defense strategy, such an event may not be far off.

True, Archer's losses are widening (its second-quarter net loss climbed to $206 million from $107 million in the prior-year period), but that's to be expected as it moves from constructing prototypes to full flight testing. The company's strong cash position, plus supporters and potential tailwinds from military deals, make this company's stock a buy right now, especially with shares trading 32% below their recent high.

Investors can expect some turbulence along the way, but they should keep Archer for the long haul, as its story is only just beginning.

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Steven Porrello has positions in Archer Aviation. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.