Why Archer Aviation Stock Sank This Week

Archer Aviation (NYSE: ACHR) stock slumped in this week's trading. The company's share price ended the period down 13.5% from the previous week's market close, according to data from S&P Global Market Intelligence.

Archer Aviation fell this week as short interest on the stock increased and investors weighed the potential impact of a leadership change at Stellantis, the automaker that has been a key investor and partner for the flying taxi specialist. But even with the recent pullback, Archer stock is still up roughly 137% over the past month.

Archer dips on rising short interest and Stellantis shakeup

Following an explosive run, Archer Aviation stock has recently attracted more attention from short-sellers. The company's valuation surged in November after Needham published a bullish report on the stock and outlined an optimistic outlook for the still-nascent flying-taxi industry. But as Archer's valuation has moved higher, some investors are placing bets that the company's share price will come back down to Earth. In turn, stock being sold short is applying a bearish valuation pressure.

Recent short-sellers also had the benefit of a business-related bearish catalyst early in the week's trading. Last Sunday, Stellantis announced that its board of directors had accepted the resignation of former CEO Carlos Tavares. The executive's departure came on the heels of missed targets and underwhelming business performance. The news was concerning for Archer Aviation investors, because Stellantis has been a substantial investor in the flying-taxi company.

What comes next for Archer Aviation stock?

After an initial selling surge following the departure of Tavares as Stellantis's CEO, investors appear to have become more confident that the automotive conglomerate will continue to be a major partner for Archer Aviation. Stellantis announced its most recent round of support for Archer in August, pledging up to $400 million to help scale the flying-taxi specialist's manufacturing capabilities. Through the manufacturing ramp-up, Archer expects to be able to produce 650 of its Midnight aircrafts per year.

While Archer still needs to achieve regulatory approvals to begin commercial operations for its flying electric vehicles, there seems to be a good chance that the company could score wins on that front in the not-too-distant future. If so, it could pave the way for the explosive stock to fly even higher -- especially if short-sellers pile into the stock and set the stage for a potential short squeeze.

On the other hand, Archer Aviation is still a pre-revenue business, and setbacks along regulatory, competitive, or macroeconomic lines could send shares tumbling. Investors should approach Archer stock with the understanding that it is a high-risk, high-reward play.

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