Archer Aviation: Everything Is On Track Including The Long-Term Tailwind

Overview

My recommendation for Archer Aviation (NYSE:ACHR) is a buy rating, as I continue to stay positive on ACHR's ability to hit its FY30 target given that it is progressing well in its R&D targets and has settled the long-standing lawsuit. Moreover, the long-term secular tailwind remains intact. Note that I previously gave a buy rating as I expected the market to continuously recognize ACHR's business prospects as it gets closer to achieving positive revenue.

Recent results & updates

My investment thesis relies largely on ACHR to track towards its goals (both R&D and commercial plans) as it is the KPI that the market is observing. For this reason, it was heartening to see ACHR maintain its momentum in flight testing and certification. Notably, the Air Force could receive the first Midnight aircraft as soon as the fourth quarter of this year (4Q23). The majority of Stage 3 Certification Plans for civil FAA certification have also been submitted by management, and some have even been accepted. Although I lack the necessary technical expertise, ACHR's track record of successful implementation makes me confident that they will have no trouble having their plans approved.

I believe the important thing to note is that regulatory bodies around the world are likely to be more receptive to the commercialization of eVTOL, which means that the underlying secular trend is strong. For instance, the FAA (Federal Aviation Administration) has stated that the finalization of operational rules will occur in 2024. By that definition, I take it as it means the allowance for the start of operations around that time and the eventual rollout of the technology on a larger scale sometime later. Another encouraging sign of demand is that the US Air Force has awarded contracts to ACHR worth up to $142.5 million, the largest for any eVTOL OEM to date. I anticipate that the size of Archer's award will increase if and when services other than the Air Force make use of this program for incremental projects. As of current, the military hopes to use eVTOL primarily for personnel transport, rescue operations, and supply chain logistics. In fact, the Marine Corps has recently visited ACHR, and I believe there may be discussions ongoing regarding the awarding of a new project (this is my personal opinion). In my opinion, the value proposition is quite clear for the military, in that eVTOLs could reduce the cost of operating expensive helicopters.

In my opinion, ACHR is still in a strong position in terms of its cash runway. Net cash for the most recent quarter for ACHR was $408 million, after a free cash flow burn of $65 million. Based on my calculations, ACHR has a total liquidity position of more than $670 million after accounting for the $215 million from the private placement and the remaining $55 million from the equity line provided by Stellantis. This level of liquidity is expected to sustain the company until the end of 2025, especially considering that management anticipates a GAAP operating expense run rate of $200 million based on the 3Q23 GAAP operating expense guidance ranging from $42 million to $52 million.

It was also encouraging to see that ACHR finally resolved its lengthy lawsuit against Electric aircraft makers Wisk and Archer end bitter legal dispute, agree to work together | TechCrunch, which Boeing acquired in full recently. The end result turned out much better than I had anticipated. With this deal, ACHR will be able to use Wisk's autonomous technology in future aircraft versions, which should speed up the company's R&D process significantly. More importantly, further development of the partnership between ACHR and Boeing through this agreement has the potential to bring long-term benefits in the form of new customers and defense contracts.

Valuation and risk

I reiterate my belief that ACHR is worth a lot more than what it is today, as it should be able to achieve its FY30 targets. According to my model, ACHR is valued at $239 in FY30. This target price is based on management's long-term guidance.

My valuation philosophy for ACHR remains the same. Since ACHR is currently in the research and development stage, I assessed its value by examining its long-term performance relative to the market (as a benchmark). Considering its profit margin outlook and the prospect of sustained growth beyond FY30, my view is that ACHR should be priced around or close to the S&P forward EBITDA multiple, which stands at 13x as of today.

ACHR is quickly spending down its cash reserves as it works to develop new aircraft and technologies. While ACHR's liquidity is healthy right now, investors might get nervous if it starts burning through cash at a faster clip in the coming quarters, increasing the likelihood that the company will need to raise capital through equity or debt. The share price of ACHR may react to both of these.

The biggest danger is if ACHR stops doing research and development. A failed product is one such event that could put an end to the bull thesis and indicate that the company is doomed.

Summary

My recommendation for ACHR remains a buy rating, driven by the company's promising progress in both R&D targets and the resolution of its lawsuit. ACHR appears to be on track to achieve its FY30 targets, and the long-term industry trend supporting eVTOL technology remains robust. Notably, ACHR's advancements in flight testing and certification, including potential deliveries to the Air Force in 4Q23, indicate its commitment to commercializing eVTOL. The substantial contracts awarded by the US Air Force and potential future projects highlight growing demand in the military sector.

Financially, ACHR maintains a solid cash runway, with over $670 million in liquidity, ensuring stability until the end of 2025. The resolution of the lawsuit with Wisk and the opportunity to utilize its autonomous technology for future aircraft versions bodes well for accelerated R&D and potential long-term partnerships with Boeing.