According to third-party estimates, the average driver in the United States spends 54 hours a year stuck in traffic. Multiplied by a total of 243 million drivers, that amounts to 13 billion cumulative hours spent in traffic each year in the United States. Globally, this figure is probably above 100 billion hours. Time, money and quality of life are lost when you are sitting in your car on the road.
What if there was a company that wanted to help solve this problem? That’s the purpose of Sagittarius Aviation(NYSE: ACHR) and other electric vertical take-off taxi (eVTOL) companies. With an innovative product and a clear goal (to help solve the traffic problem), there is a lot of potential for these new air taxi companies. Does that make Archer Aviation a once-in-a-decade buying opportunity in 2025?
An eVTOL is an innovative type of vehicle that is similar to a helicopter, but with some important improvements. First, eVTOLs are much quieter than helicopters, making them easier to tolerate in neighborhoods and cities. Secondly, they are fully electric and use tilt propeller technology to make them cleaner and more energy efficient.
Archer Aviation is building an eVTOL to help people travel faster in busy urban areas. For example, it highlights the journey from downtown Manhattan to Newark airport, which can sometimes take more than an hour by car. Once the company’s eVTOL point-to-point air taxi network is built, the company says this trip will take less than 10 minutes.
This can be a huge time saver, not only for the riders, but also for other people on the road. For every person taking an eVTOL trip from Manhattan to Newark, that’s one less car on the road. It’s likely that it will cost a pretty penny for this air taxi ride (and it will need to for the network to make a profit), but I think there will be plenty of demand for the service. Only the wealthiest people have the opportunity to skip the typical airport trip involving helicopters and private jets.
There are plenty of people with enough wealth who are willing to pay hundreds of dollars for an air taxi ride if it means a 10-minute flight to the airport, at least in wealthy cities around the world. This is the passenger segment that Archer Aviation is targeting, with plans to open networks in places like Japan, India, the Middle East and the United States. According to management, the first point-to-point network will be operational by the end of this year.
Not only Archer Aviation sees electric air taxis as a modern solution to traffic problems. There are eight other eVTOL stocks currently trading, and this only counts those that are publicly listed. Fortunately for Archer Aviation, it is one of the largest and has a lot of financial backing. It’s also about to launch a service (hopefully sometime in 2025).
The financial backing is huge for an air taxi startup, because of all the capital costs required to build the product, gain regulatory approval, and build all the startup locations. Over the past twelve months, Archer Aviation has burned $415 million in free cash flow. At the end of the third quarter, the company had $500 million in cash on its balance sheet and had a commitment of $400 million from Stellantis to help build its manufacturing facility.
Hopefully these funds will bridge the gap as Archer Aviation works to gain regulatory approval for its taxi network and build all the air taxis it needs. If this gap can be bridged, Archer Aviation can fill a lot of orders. The backlog at the end of the third quarter of 2024 was approximately $6 billion, with commitments from airlines and cities around the world. There is clearly a demand for eVTOL solutions. Why? Because when they work, there are tangible benefits for society.
ACHR Free Cash Flow data by YCharts
Electric air taxis are a promising product. Personally, I hope that these companies will succeed, and in a big way. That doesn’t mean you should buy Archer Aviation stock. First, the shares are up 167% in the last three months and now have a market cap of $4 billion. Today, Archer Aviation generates zero dollars in revenue and burns hundreds of millions in cash annually.
Based on some estimates from the committed order book, a typical Archer Aviation air taxi will sell for $5 million. Manufacturers like these have low margins, which means the company needs a lot of orders and operating leverage to achieve positive cash flow. Even at 100 units sold per year, that’s only $500 million in sales and likely minimal profit generation.
With a market cap of $4 billion, this seems like a hugely expensive stock. Avoid adding Archer Aviation stock to your portfolio at these prices, even if you think the underlying eVTOL technology has potential.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.
Is Archer Aviation a one-time buying opportunity in 2025? was originally published by The Motley Fool