Archer Aviation Is Down 61% -- That's Great News for Long-Term Investors

Investors have waited for Archer Aviation (NYSE: ACHR) to live up to its potential since the stock began trading in 2021. The wait has taken a toll on Archer Aviation, which currently trades more than 60% below its all-time high. But much has changed since years ago, when the stock represented an idea more than an actual business.

Archer Aviation has spent years designing and testing its electric vertical takeoff and landing (eVTOL) aircraft. It's finally nearing the end of the regulatory approval process and could begin its initial U.S. operations later this year as part of the White House's eVTOL Pilot Integration Program. Here's why the stock's steep decline is actually good news for long-term investors.

The eVTOL market might not be very large right away

The eVTOL market has promise, but this looks like a niche market right now. Broadly speaking, eVTOL aircraft, including Aviation's Midnight, specialize in short trips with fast turnaround times and have very limited seating and cargo capacity. Midnight seats only four passengers and a pilot. The aircraft from Archer Aviation and other eVTOL companies will initially serve as electric air taxis in major cities or be used for military applications.

Image source: Archer Aviation.

Archer Aviation has gotten its foot in the door with a military contract for up to six eVTOL aircraft. It has several commercial partnerships, including strategic support and financial backing from United Airlines and Stellantis. Still, the pie probably won't be very large for quite some time. Management consulting firm Marketsandmarkets estimates the global eVTOL industry will grow to roughly $5 billion by 2035.

The stock is still small enough to deliver solid investment returns

When investing in stocks of companies with little or no revenue, you don't want a bunch of hype and excitement that raises the market cap -- especially here, where the initial market opportunity might be small. Archer Aviation is just starting to commercialize its business, with only $1.9 million in trailing-12-month sales. Even after the stock's 61% decline, the current market cap of $4 billion seems like quite a lot to pay.

It's still better than investing in Archer Aviation when it's worth $7 billion or more, which is why this decline is good news for long-term investors. Suppose Archer Aviation takes 20% of the market by 2035, putting revenue at $1 billion. Depending on how Wall Street values the stock, there's at least a realistic path to investment returns that Archer Aviation's business results can sustain from the current market cap.

Who knows what might happen? Maybe Archer Aviation or the eVTOL market grows faster than that, or the company lands a bigger military contract. This uncertainty is what makes stocks like Archer Aviation risky but fun, and maybe even lucrative if you invest responsibly.

Just remember, the higher the valuation you pay, the less likely the stock is to overcome it and reward your investment. So celebrate Archer Aviation's declining share price, and, if you believe in the business, root for opportunities to buy it even lower.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.