adventtr
The eVTOL (electric vertical take-off and landing aircraft) market without doubt offers opportunities, and when those opportunities materialize, there will be a huge upside for stockholders. However, disruptive technologies and the required scaling come at a cost, infusing the investment with what I see as an almost unbearable risk. As a result, while I am extremely bullish on the prospects of eVTOLs in a UAM (urban air mobility) setting, I am less convinced that the early birds (investors) get the worm due to the funding risk that continues to exist for many companies in this space.
As I am going through the Archer Aviation Inc. (NYSE:ACHR) Q1 2023 results now, the stock is down 13% after publishing its earnings yesterday. In this report, I will shine my light on this eVTOL name.
Archer Aviation Marches Through Timeline But Risks Loom Large
Archer Aviation
Archer Aviation has been marching through the timeline rather well, with the manufacturing of their technology demonstrator completed in Q3 2021 and full transition completed in Q4 2022. Its Midnight prototype has been completed and will begin flight testing for the company this summer, with 6 conforming Midnight vehicles set to start flight testing next year. The company eyes certification and commercialization in 2025. That is actually a silent one-year slip to the schedule shared in April and explains why the stock is down today.
I went through the Archer Aviation call transcript and shareholder letter, and to be fair it was extremely useless. All eVTOL companies have the big challenge of matching the timeline with liquidity runway. As an emerging company, the reporting standards are less strict, but to me, it seems Archer Aviation doesn’t even try to provide insightful guidance on key items like cash consumption this year. That definitely is not how to score points.
So, it is all about FAA certification and not running out of cash before that time. What I find hard to fathom with most eVTOL companies is that their cash requirements are big and their cash consumption profile should change phase-by-phase, but they are not even trying to provide that insight. For instance, Archer Aviation has built one prototype, and it will start building 6 conforming models for testing, but they don’t even put the effort to discuss how that affects the cash burn profile. Early line numbers are extremely costly to produce, so they should have provided some information on how their cash usage will be through the building of these prototypes, and then how things might get better during flight testing or not. Right now, investors are expected to invest while they are basically blindfolded on the cash consumption going forward.
Archer Aviation
Currently, Archer Aviation has $450 million in cash and cash equivalents. It burned through $81.3 million in Q1. If roughly $80 million is what we can expect the cash burn to be for the remainder of the year, then the company will have $210 million by the end of the year even before flight testing has started. Just putting the cash consumption at $80 million per quarter, because we simply don’t know. By the end of 2024, the cash deficit would be $110 million and the company expects certification in 2025. Let’s say that would be in early to mid-2025; it would indicate another $80 million to $160 million, indicating a cash deficit of up to $270 million by 2025. I believe that assuming the cash usage to be at $80 million per quarter and a one-year flight test campaign are upbeat expectations.
Even in those projections, Archer Aviation will not have enough cash on hand. It has $150 million in equity investment from Stellantis N.V. (STLA), but from what I read in the filings it basically is allowing Archer to use the $150 million in exchange for Stellantis obtaining shares, which means shareholders get diluted. Even when dipping into the Stellantis funds, it doesn’t seem enough to cover up to 2025, let alone beyond that point and at the point where funds are required for scaling production.
Pre-delivery payments are presented as a big relief to the cash profile and, in some way, every dollar that comes from pre-delivery payments is a dollar that the company won’t dilute shareholders for. However, I believe that if you consider that most eVTOL manufacturers don’t even have the funds to fund a one-year delay in certification, then banking on PDPs is a risky thing to do if you consider how challenging it is to ramp up production as a new company.
Conclusion: Archer Aviation Looks Promising, But Its Timeline and Cash Pile Are Not Aligned
Perhaps I am too pessimistic, but what I am currently seeing is that analysts including Wall Street analysts are putting buy ratings on eVTOL stocks while completely ignoring the big risk of dilution to shareholders, which could quickly bring price targets down. I am not bearish on the prospects of eVTOLs, but I do believe that for many names the risk-reward profile is not a compelling one. Analysts are generally not factoring in the major challenges that will exist in the next two-three years, and in those two to three years many eVTOL manufacturers will actually run out of cash.
So, I fail to see how analysts can be extremely bullish on Archer Aviation Inc. stock and completely ignore that disruptive technology does not equate to shareholder value. In some cases, being too early buying in as a shareholder can leave you with a loss rather than a profitable entry point, and I believe that is the case with many eVTOL companies.
