My primary apprehension pertaining to Archer Aviation:
The advancement of urban air mobility is accelerating faster than many realize, with electric vertical takeoff and landing (eVTOL) aircraft, like battery-powered replacements for traditional helicopters, poised to revolutionize urban transit. According to JPMorgan analysts, this budding market could reach a staggering $1 trillion by 2040.
One company, Archer Aviation (ACHR -10.02%), has swiftly stood out from the competition due to its exceptional execution and strategic partnerships. Archer boasts strong order flow, vital industry partnerships, and a clear route to manufacturing. Thus, it should be a focus for growth investors.
However, beneath this inspiring facade lies a potential threat that could substantially impact long-term shareholders. Here's why I'm both enthused and apprehensive about Archer's development.
Pioneering in Georgia
I'm particularly captivated by Archer's new 400,000-square-foot manufacturing facility in Covington, GA. This development signifies a critical step in the company's transition from concept to commercialization. Initial production is projected for early 2025, with the aim of producing two aircraft per month by year's end.
By 2030, the facility aims to produce 650 aircraft annually, which I view as a balanced approach to scaling production. The production growth strategy demonstrates ambition and pragmatism, traits I seek in early-stage aerospace companies.
Validation through collaborations
What piques my interest next is Archer's recent exclusive agreement with Anduril Industries to develop military aircraft. In light of Anduril's recent advances in artificial intelligence and autonomous systems, this partnership becomes even more compelling. Anduril has just announced a strategic partnership with OpenAI to enhance autonomous defense capabilities, with a focus on counter-drone applications.
I see significant potential in the synergy between Archer's eVTOL expertise and Anduril's Lattice software platform, which allows a single operator to manage multiple autonomous systems across various domains. By developing autonomous or optionally piloted military aircraft, Archer and Anduril could open up new military mission possibilities for the Department of Defense.
Additionally, the $430 million capital raise supporting this partnership, which included participation from strategic investors like United Airlines and Wellington Management, underscores the market's recognition of these opportunities.
Meanwhile, on the commercial front, Archer's joint venture with Japan Airlines and Sumitomo Corp. could generate up to $500 million in aircraft orders. These collaborations have propelled Archer's tentative order book beyond $6 billion, validating both its technology and business model.
Defense sector potential
I'm drawn to the market's apparent underestimation of Archer's defense prospects. Historically, major defense contractors, such as Lockheed Martin and General Dynamics, have significantly outperformed the S&P 500 due to lucrative prolonged government contracts and consistent bipartisan support for defense spending.
With a market cap of only $3.6 billion, Archer's current valuation appears to disregard its defense potential through its partnership with Anduril. Developing specialized hybrid VTOL aircraft for military applications could generate sustained, high-margin revenue streams for decades.
Many successful defense contractors started as small, specialized tech companies before becoming titans in the industry. I believe Archer's early foray into this sector could have similar effects on the company and its shareholders-as long as it maintains its independence long enough to capitalize on the opportunity.
Prudent financial management
I'm also impressed by Archer's financial discipline for a pre-revenue company. With more than $500 million in cash and consistent quarterly spending, the company's balance sheet exhibits exceptional strength.
Furthermore, Archer's share count increase of 12.4% over the past three years is significantly lower than its peers' average 21% dilution rate. This thoughtful approach to capital management suggests that Archer's leadership values shareholder interests.
This is a crucial trait I consider when investing in forward-thinking growth companies.
A concealed risk of a partnership
However, my apprehensions surface here. Global auto giant Stellantis, formed by the 2021 merger of Fiat Chrysler and PSA Group, owns a substantial 20.2% stake in Archer. While Stellantis' manufacturing expertise and financial support are essential for Archer's development, I worry that this large shareholding could foreshadow a full acquisition attempt.
Stellantis provides valuable automotive mass production knowledge and has invested heavily in Archer's success. However, the automaker is grappling with its own challenges, namely the departure of CEO Carlos Tavares and declining European market share, which adds uncertainty to its strategic direction.
To sum up, I worry that with Archer's substantial success, Stellantis, facing challenges in the industry's electrification transition, might view acquiring Archer as a strategic necessity. Even at a considerable premium, such a scenario might deny shareholders the full value of Archer's long-term potential in air taxi services, aircraft sales, and defense contracting.
The investment conclusion
In my opinion, Archer Aviation embodies the rare startup that has successfully navigated the challenging path from concept to imminent production. However, the partnership that facilitated this success may ultimately limit shareholders' returns.
Investors need to consider the massive prospect of the company, but also consider the risk that Stellantis' substantial shareholding might result in an early takeover, halting what could be a lengthier and more lucrative growth journey. Well, Stellantis boasts a strong track record of purchasing innovative firms that possess a technological advantage - and Archer falls perfectly into that category.
- If Stellantis decides to acquire Archer Aviation due to its substantial shareholding and the challenges the automaker is facing in the industry's electrification transition, it could potentially prevent Archer's shareholders from realizing the full value of its long-term potential in air taxi services, aircraft sales, and defense contracting.
- Given the potential of the eVTOL market, investing in Archer Aviation could offer significant returns, but investors should carefully weigh the risk of an early takeover by Stellantis, which could potentially limit their returns in the long term.
