Archer Aviation Stock: Buy, Sell, or Hold?

Source The Motley Fool

The back half of 2024 has been a strong period for speculative high-growth stocks. Like dozens of these companies, Archer Aviation (NYSE: ACHR) is up over 100% in the past month, with its stock boost happening right around the United States presidential election. Archer Aviation is an air taxi company looking to build a network in multiple wealthy cities around the globe with its point-to-point strategy.

Is Archer Aviation stock a buy, sell, or hold for investors today? Let's take a look into this soaring air taxi start-up and find out.

Big potential in commercialized air taxis

Archer Aviation is building a fleet of electric vertical take-off and landing taxis, otherwise known as eVTOL. They are similar to helicopters, but slightly different and less noisy, which should allow them to operate more in cities. Management is aiming to tackle heavily traffic routes that take around an hour to drive, such as going from downtown Manhattan to the airport. In its proposed route, a trip from the south end of Manhattan to Newark Airport will take only nine minutes. Customer value comes from the exclusive service and time saved, which wealthy people will pay a pretty penny for.

Due to the long regulatory journey, Archer Aviation is not operating today. In 2025, it plans to produce around two aircraft per month and (hopefully) commence operations in New York, Tokyo, and Abu Dhabi. Its order book is large, estimated to be over $6 billion, which shows the commercial demand for eVTOL taxis if the technology and infrastructure can work correctly.

Once the test routes start working, there is a near-endless growth runway for Archer Aviation to go after. There isn't a city around the world that doesn't deal with traffic issues, with more and more routes that can be added to its point-to-point network in major urban areas. It will be a long journey, but this disruptive new mode of transportation could become a big deal over the next decade, at least in a select few cities around the globe.

No revenue, heavy losses

Potential is a word that should be associated with Archer Aviation. Don't think this is a slam-dunk guarantee yet. Archer Aviation has never generated sales and is still undergoing regulatory approval with the Federal Aviation Association (FAA). Sure, the company will generate a lot of sales when its taxi network starts operating, but that has not happened yet.

Its financial statements are fairly ugly as a result of being pre-revenue. Free cash flow was negative $415 million over the last 12 months and has only gotten worse since Archer Aviation went public two years ago. Cash burn will likely get worse as it builds out its inventory of eVTOL vehicles, which will take a lot of upfront capital to build. Even if the taxi network starts operating in a few cities, Archer Aviation will still be losing money. Even if it gets to 100 point-to-point networks generating $100 an hour in revenue 24/7 and 365 days a year, that equates to just $87.6 million in annual revenue, or well below its current expense base. This scenario will not occur for many years, either.

ACHR Free Cash Flow Chart

ACHR Free Cash Flow data by YCharts

So should you buy Archer Aviation stock?

It is undeniable that Archer Aviation stock has crushed the market over the last few months. That doesn't mean it will do well for the rest of the year and into 2025, though. I believe Archer Aviation stock is a sell for investors after this recent run-up.

For one, the stock trades at a market cap of $3.3 billion. This is for a company that generates zero dollars in annual sales. Second, as calculated above, Archer Aviation's taxi network revenue will not come close to clearing its expense level even if it has 100 routes operational. An eVTOL taxi network is not going to have high gross margins. There are electricity, pilot, and depreciation costs that will eat into the company's ability to generate a profit.

At the end of last quarter, Archer Aviation had over $500 million in cash on the balance sheet and plans to get more than $400 million in new funding. At its current burn rate, this would be only around two years until the balance sheet runs dry. The company will almost definitively not be generating positive free cash flow in two years.

In fact, given how much money Archer Aviation is spending before its network is even operational, I doubt this business will ever generate positive cash flow. For this reason alone, investors should strongly consider selling Archer Aviation stock. This does not seem to be a durable long-term stock market winner.

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Brett Schafer 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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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