The past few years have been a rollercoaster ride for investors. In 2022, inflation reached abnormally high levels, leading the Federal Reserve to pursue an aggressive rate hike strategy. It’s no surprise that investor enthusiasm waned and stocks plunged epically.
But as always, capital markets showed their resilience last year. Thanks to developments in hot areas like artificial intelligence (AI), a booming new spin on the weight loss market in the pharmaceutical sector, and an improving macroeconomic picture, investors gradually adopted a more bullish mindset, and stocks started to bounce back.
This upswing continued into 2024, with the S&P500 And Nasdaq Composite So far this year, they are up 23% and 29%, as of the market close on December 18. One thing to be careful about in a bull market, however, is that some stocks tend to experience upward momentum that may not be fully justified.
Shares in electric air taxi manufacturer so far this year Sagittarius Aviation (NYSE: ACHR) are up 38%, beating both the S&P 500 and Nasdaq by a significant margin. While this may give the illusion that Archer is a no-brainer opportunity, investors should be aware that the company is still in its early stages.
Although Archer has received a lot of attention from major brands in the commercial aviation industry, Archer remains a pre-revenue operation and is not yet commercially scaling its vehicles. For this reason, I’d say a lot of the gains in Archer stock in 2024 are more rooted in the hype and bullish sentiment around the electric vehicle (EV) more broadly.
Nevertheless, the company has just announced what could be a groundbreaking collaboration. Below, I’m going to explore an opportunity that I think is flying under the radar and assess why Archer could emerge as a leader in the long term.
In early December, Archer announced a strategic partnership with defense technology startup Anduril. Anduril specializes in autonomous defense systems, in particular a series of drones intended for land and sea reconnaissance missions.
Notably, Archer has already received significant interest from the US military. Given the low noise emissions of electric vehicles, the military could potentially benefit from using Archer’s aircraft during stealth operations.
For me, joining forces with Anduril not only strengthens Archer’s existing footprint in the public sector, but also adds a great source of legitimacy around the company’s progress as it looks towards commercialization – which is a position in the makes stocks quite tempting at the moment.
As I’ve said several times, military operations are an incredibly overlooked part of artificial intelligence. As far as software applications go, I understand Palantir Technologies as the de facto leader of the US military.
That said, the defense industry has many use cases beyond software and data analytics. According to Allied Market Research, the global total addressable market (TAM) for stealth operations technology is currently estimated at $45 billion. Allied estimates that the market will continue to grow at a compound annual rate of nearly 7% between 2024 and 2033, reaching $79 billion by early next decade. Furthermore, the market for military robotics and autonomous systems is expected to nearly triple in size over the next decade – reaching $32 billion by 2032.
As you can see, Archer is now eyeing a public sector opportunity that could be worth more than $100 billion early next decade. I believe the company’s partnership with Anduril will help increase its potential in the US government while diversifying its business model beyond working with commercial airlines.
Given that the company has yet to generate any revenue, valuing a company that burns cash is always more of an art than a science. Currently, Archer’s market cap is $3.6 billion. Furthermore, according to the company’s latest shareholder presentation, Archer has an order book of more than $6 billion. Using the company’s purchase orders as a proxy for revenue, Archer’s implied price-to-sales (P/S) multiple would be roughly 0.5.
While this might indicate that Archer stock is a buy, I personally don’t trust the above analysis. Purchase orders do not always translate into revenue and order amounts can change at any time. Additionally, Archer still has a number of regulatory hurdles to overcome before the company truly scales.
Ultimately, I view the deal with Anduril and Archer’s foray into the defense industry as a significant achievement and a source of validation for the company’s long-term ambitions. But that said, I still largely see Archer as a speculative opportunity heading into 2025.
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Adam Spatacco holds positions at Palantir Technologies. The Motley Fool holds positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
1 Reason Why Archer Aviation Could Be a Screaming Buy in 2025 was originally published by The Motley Fool
