The market has no shortage of grandiose technology platforms that promise to revolutionize how people live and do business. Electric vertical takeoff and landing aircraft (eVTOLs) are no exception. These flying taxis could help people avoid urban traffic and open the skies to fast and efficient transportation.
And Archer Aviation (NYSE: ACHR) aims to help make this dream a reality. Let’s discuss what this mission could mean for the company’s long-term investors.
Analysts at Morgan Stanley are incredibly optimistic about the eVTOL market’s potential and don’t think investors are prepared for the scope of what they call a “revolution” in urban air mobility. They believe the market could be worth $1 trillion globally by 2035 and $9 trillion by 2040 as it replaces some forms of ground-based transportation.
This technology is exciting because, like electric cars, eVTOLs provide a quieter and more environmentally friendly mode of transportation at a time when governments around the world are racing to reduce emissions. The ability to take off and land vertically could also allow these aircraft to operate in cities and other dense urban environments.
That said, analysts can get carried away by hype, so it’s a good idea to take their projections with a grain of salt. For a company like Archer Aviation, the more important question is whether or not it can maintain its operations long enough to bring eVTOLs into widespread adoption.
EVTOLs are a relatively new business concept. And Archer’s second-quarter earnings highlight the challenges of operating in an industry that isn’t quite ready for prime time. The company doesn’t even report revenue on its income statement, instead jumping straight to operating expenses like research and development and office overhead, which combine to give it an operating loss of $121.2 million.
To be fair, it is normal for disruptive growth stocks to generate significant losses until their operations scale up into profitability. For example, the electric automaker Tesla didn’t generate an annual profit until 2020 — 17 years after its founding. Archer was founded in 2018, so a similar timeline would put its first profit in 2035.
However, investors should be cautious about getting in too early on this potential long-term opportunity because of the risk of equity dilution.
Image source: Getty Images.
While eVTOL technology will make or break Archer over the long term, management faces a much more pressing challenge right now: keeping the lights on. As of June, the company reported just $360 million worth of cash and equivalents on its balance sheet, only enough to cover a few more quarters of current operational cash burn.
Like many unprofitable companies, Archer Aviation raises capital by selling more units of its stock. While this move will help it survive, it will dilute current investors’ claims on future earnings.
As of August, the number of shares of Class A common stock outstanding stood at 319,442,565, compared to 208,578,693 units this time in 2023, representing an increase of 53% in just one year. The silver lining is that Archer Aviation’s equity backers include mainstream companies like the global automaker Stellantis and United Airlines. And their willingness to pour money into the company suggests confidence in its ability to eventually succeed.
Just like Tesla, Archer Aviation has the potential to make many millionaires (and even billionaires). However, with no revenue or clear pathway to profitability, investors face years of potential equity dilution — if not decades — before the company becomes viable, and this might be too much risk to take.
It makes more sense to wait on the sidelines for eVTOL technology to develop further before buying the stock.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.
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