Should You Buy Archer Aviation While It's Below $10?

Advancements in technology are creating new industries worth billions of dollars. Society is on the precipice of electric vertical takeoff and landing (eVTOL) transportation -- electric flying taxis that can help people get around in densely populated areas without further clogging up highways.

Archer Aviation (NYSE: ACHR) is one of the companies vying for a top spot in this industry, which experts believe may grow by more than 50% annually to over $23 billion by 2030.

The company's third-quarter earnings included progress updates that helped spark a massive rally, causing shares to nearly double over the past month. If this momentum continues, it might not be long before the stock approaches $10. Should investors consider buying the stock now?

Here is what you need to know.

A futuristic idea could soon become an actual, working business model

As recently as a decade ago, the idea of electric aircraft lifting, hovering, and lowering people from place to place seemed like something out of a sci-fi movie, but it may soon become a reality. Archer Aviation is one of several companies developing electric vertical takeoff and landing (eVTOL) aircraft, essentially an electric air taxi capable of flying people short distances.

Archer Aviation merged with a special purpose acquisition company to go public in 2021. The company is still developing its eVTOL aircraft, so the business doesn't generate meaningful revenue. The stock market soured on such speculative investments following the 2021 market bubble, so Archer Aviation is still down 60% from its former high, even after the recent rally.

However, the company's Q3 earnings included several updates that signaled its eVTOL business is making significant progress toward launching commercial operations. The Q3 updates include:

1. Anticipated completion of its production facility over the coming weeks. Management is targeting 2025 production, which would start slow and use early models for testing and initial commercial deployments.
2. Progress through the Federal Aviation Administration (FAA) regulations, including near completion of phase 3 and strong momentum in phase 4. This approval is needed to operate eVTOL aircraft legally in U.S. airspace.
3. Partnership with the Abu Dhabi Investment Office to target launching an air taxi service in the United Arab Emirates as early as Q4 2025.
4. Partnership with Soracle, including a planned $500 million order. The deal pushes Archer Aviation's total order book to over $6 billion.

Ultimately, Archer Aviation must build its aircraft, gain approval to fly it, and then successfully sell it. These updates show that all of this is moving in the right direction.

Still, there is so much investors can't know right now

These updates give investors hope that Archer Aviation will eventually graduate from a pre-revenue company with an idea to an actual revenue-generating business. However, there's still a lot investors don't know.

Unfortunately, Archer Aviation is far from the only company racing to bring eVTOL aircraft to the skies. Joby Aviation is a similar company that's already completed a demo ride in New York City. There will also be competition from aviation powerhouses Boeing and Airbus.

Archer Aviation's $6 billion order book sounds impressive, but the company notes that these orders are conditional, which means they could fall through if something goes wrong. Plus, it's unclear how much capital the company needs before it can sustain itself with cash flow.

In other words, investors may face dilution over the coming years while management issues shares to raise funds as needed. It recently asked Stellantis, which has previously invested in Archer Aviation, for up to $400 million in additional capital to help it fund production.

If that wasn't enough, it's unclear what Archer Aviation's profits, market share, or long-term growth rates will look like. These variables all matter to a stock's valuation.

Is the stock a buy under $10?

Archer Aviation's market cap is about $2.5 billion at its current price, and at $10 per share, it would be over $4 billion. Analysts currently have the company generating around $1.1 billion in revenue in 2028, so investors must be careful not to unknowingly pay too high a valuation because they had unrealistic expectations.

The stock may not support a high price-to-sales (P/S) ratio over the long term. Airlines and automotive companies trade at low P/S ratios due to competition, low margins, and high capital expenditures. If Archer Aviation proves similar, the stock may already be pricing in revenue growth into the 2030s, especially if shares keep heading toward $10 and that $4 billion market cap. Therefore, investors may want to stay patient and avoid chasing a stock that has doubled in just a few weeks.

Remember, Archer Aviation's business may take years to establish itself. It's a high beta stock, which means it's volatile. There will probably be pullbacks along the way. Investors wanting to own Archer Aviation should dollar-cost average into shares, limit Archer Aviation to a small percentage of a diversified portfolio, and look for better buying opportunities when the stock market inevitably declines.

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