With Archer Aviation's Share Price Down 53%, Could a Reverse Stock Split Be About to Happen?

Playing "how low can you go?" is fun at a limbo contest but not in the stock market. But that's what shares of electric vertical takeoff and landing (eVTOL) company Archer Aviation (NYSE: ACHR) have been doing over the past year. They've tumbled from a high of over $13 per share to just $6.31per share today.

While that 53.5% decline isn't quite as steep as rival Joby Aviation's (NYSE: JOBY) 62.5% share price plunge, it's still one of the worst performances in the aviation industry.

That kind of stock price drop has sometimes prompted companies to reverse-split their stocks. Could such a reverse split be in the cards for Archer? Here's what investors should know.

Image source: Archer Aviation.

Why companies perform reverse splits

In a regular stock split, a company exchanges multiple new shares for a single existing share, thereby substantially lowering the per-share price of the stock. This kind of move is often used when management thinks its share price has gone up so far that it may be getting too expensive for small-dollar investors to consider buying. Stock splits are often seen as a good thing -- a sign that management is confident in the stock's further growth prospects.

But in a reverse stock split, the company exchanges a single new share for multiple existing shares. This often happens when a company's share price has experienced a dramatic drop.

Image source: Getty Images.

Reverse stock splits are often the best way for a troubled company to avoid being delisted by a stock exchange. The New York Stock Exchange (NYSE), for example, requires companies to maintain an average share price above $1 for 30 consecutive trading days. A NYSE company with a share price that has fallen to $1.25 per share might be concerned about its ability to stay above that threshold and could issue, say, a 1-for-10 reverse split, which would exchange 10 of the existing $1.25 shares for one new share worth $12.50, keeping the stock price solidly above the delisting threshold.

But investors are aware of this, and that's given reverse splits a bad reputation, so companies are usually hesitant to use them unless they have to do so.

Is a reverse split likely for Archer?

Even though Archer's share price has fallen into the single digits, its price of $6.31 per share is well above the $1 per share minimum to remain listed on the NYSE, so it doesn't need to issue a reverse split to stay listed there. And although it's worth a lot less than it was last year, the company is still valued at $4.9 billion, which is a premium price for an early-stage company like Archer.

Archer just signed a definitive agreement with Boeing (NYSE: BA) to acquire its Wisk Aero eVTOL subsidiary, as well as its SkyGrid and Insitu subsidiaries, which focus on autonomous flight. It's also been eagerly awaiting commercial approval for its Midnight eVTOL from the Federal Aviation Administration (FAA). Reverse splitting the stock would likely call that confidence into question and erode investor confidence.

Because of all of these factors, a reverse split of Archer Aviation stock is very unlikely to occur in the near term.

John Bromels has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Boeing. The Motley Fool has a disclosure policy.