Electric vertical take-off and landing vehicles (eVTOLs) promise to revolutionize transportation by allowing people to soar above traffic in dense urban areas. And Archer Aviation (ACHR -1.32%) could be a great way to bet on this long-term opportunity. Let's explore the pros and cons of the company to determine where it might be in the next three years.
A new industry or another hype cycle?
The eVTOL opportunity is stirring optimism for many on Wall Street. Analysts at Morgan Stanley believe it could be worth $1 trillion by 2040 as it disrupts the market for traditional land-based taxis. And if reality hits even a fraction of these lofty projections, early movers like Archer Aviation could be on track to mint their fair share of millionaires.
Granted, it is never easy to tell a real long-term opportunity from a hype cycle. In the past, analysts breathlessly praised other industries like the metaverse, virtual reality, or space tourism, only to go silent when things didn't go as planned. That said, the eVTOL story seems a little more credible because of its obvious and undeniable practicality. These aircraft offer clear advantages over traditional helicopters.
For starters, electric powertrains make eVTOLs quieter and potentially cheaper to manufacture and operate. The aircraft are also generally smaller and easier to fly in dense urban areas, making them ideal for frequent short-haul trips (like from airports to city centers). Over the coming years, investors could expect eVTOL use cases to expand as electric battery tech improves and they are synergized with automation.
What about the fundamentals?
Like many companies that went public through special-purpose acquisition companies (SPACs), Archer Aviation is at a very early stage in its business development. In the third quarter, the company generated virtually no revenue, but that didn't stop it from incurring an operating loss of $122.1 billion as it poured money into research and development to test its eVTOL platform and bring it into commercial operation.
However, Archer Aviation may be on the cusp of its big break. By the end of the year, it expects to complete a 400,000-square-foot manufacturing facility for Midnight, its flagship eVTOL platform. The construction is being done with the help of global automaker Stellantis, and it is expected to support the production of over 650 aircraft per year, making Archer Aviation the first eVTOL company to start large-scale manufacturing.
The company also seems to be attracting early clients. In the third quarter, management helped establish a consortium with the Abu Dhabi Investment Office, which plans to launch an air taxi service in the United Arab Emirates in 2025. It also partnered with Japan Airlines and Sumitomo, which plan to order up to $500 million worth of Archer Aviation's Midnight aircraft through their joint venture, Soracle.
In total, Archer Aviation now boasts an indicative order book of over $6 billion, which means it can quickly start generating revenue when commercial operations possibly begin next year.
Image source: Getty Images.
Where will Archer Aviation be in the next three years?
Over the next three years, Archer Aviation's biggest challenge will likely be government regulation, which is outside its control. A business model that involves flying aircraft over dense urban environments naturally poses some safety concerns that could slow down the approval process.
I don't think it's possible for investors to reliably predict when large-scale eVTOL commercial operation will be allowed in the U.S., even when it becomes technically and economically feasible.
That said, Archer Aviation's partnerships with potential customers in foreign jurisdictions could help drive the next three years of growth until the U.S. market matures. The stock looks like a long-term winner, but investors shouldn't expect quick returns.
