Down Over 30% From Its 52-Week High, Is Now a Good Time to Buy Archer Aviation Stock?

Key Points

• Archer's Midnight aircraft could be carrying passengers by next year.

• The business has billions in orders already as demand is high for its aircraft.

• Expectations are also high, however, as the stock has rallied more than 200% in the past 12 months.

• 10 stocks we like better than Archer Aviation ›

Archer Aviation (NYSE: ACHR) doesn't generate any revenue right now, but investors are hoping that it may not be too long before that changes. The company makes electric vertical takeoff and landing (eVTOL) aircraft. And its flagship aircraft, the Midnight, is close to commercialization. This time next year, the company could be offering air taxi services in multiple markets.

The excitement around the business has led to Archer's market cap rising to around $6 billion. And that's with shares of Archer falling 3% this year (as of Sept. 22). It's now down more than 30% from its 52-week high of $13.92, which it hit back in May. Is now the time to add the stock to your portfolio?

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Image source: Getty Images.

Commercialization could trigger a rally for the stock

The big catalyst that many investors are eagerly awaiting is for Archer to start carrying passengers and begin commercialization. Not only could that allow the business to start generating a steady stream of revenue, but it would also showcase the aircraft and prove that it may be a viable solution to traffic problems in congested cities.

Archer has been working on certifying its Midnight aircraft with regulators and it may begin providing regular air taxi services sometime next year. A big opportunity is in big markets such as Los Angeles, where traffic is a massive problem. Archer has been named the "Official Air Tax Provider of the LA28 Olympic Games," which will be a great opportunity to show off its capabilities to the world in a few years.

It has also delivered aircraft to the United Arab Emirates and begun a flight test program there, as that may be one of the first markets it enters.

This is the big question mark around Archer's business

There is no doubt there is a need to ease congestion in big cities, and eVTOLs can potentially play a part in the solution. They are environmentally friendlier options as they have zero emissions, and many businesses are eager to get involved; Archer's order book is up to around $6 billion, suggesting incredible demand for the aircraft already.

But the big question mark is whether this can turn into a profitable, sustainable business. And that will likely take a long time to answer (i.e., years). Commercial airplane manufacturer Boeing, for example, has often struggled to generate a gross profit margin that is more than 10%.

And the piloted Midnight can transport just four passengers; for that to be a big part of its business, Archer would need to scale significantly to generate a lot of revenue while still offering affordable prices for its customers. During that time, its costs would skyrocket, which means investors should brace for not just losses but also frequent stock offerings and dilution.

Archer's stock may look cheaper, but it's still full of risk

Over the past 12 months, Archer's stock has tripled in value, and many investors may be cashing out their profits right now, hence the recent decline. However, the stock is still highly valued despite it not generating any consistent revenue, and without a clear path to profitability.

Archer remains a speculative stock at this stage and it should be treated as such. This is an investment that is primarily suitable for investors with a high risk tolerance and who can afford to lose most or all of their investment. If you're going to invest in Archer, you may also want to consider rounding out the rest of your portfolio with safer stocks or S&P 500 index funds to balance out your risk.

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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.