Cathie Wood’s Bet on Flying Taxis (Archer Aviation)

Video: A review of Archer Aviation's business fundamentals.

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Transcript

Cathie Wood has recently bought up around five million shares of a company called Archer Aviation across several of her ETFs. Ticker ACHR.

When you think electric air taxis, you’re probably thinking of the classic scenario of flying cars painting the city skylines… but that’s not quite what these companies have turned out to be.

Archer is a part of an emerging sector of electric vertical take off and landing aircraft, also known as eVTOLs.

In this video, I’ll provide an overview of the company, and some of the issues I think they might face as they look to scale their business to profitability.

eVTOLs are seen as one of the potential solutions for chronic traffic and congestion in major cities. We’ve all seen or heard of how bad traffic can get during most workdays in places like California.

Well, taking some of those travelers into the skies could help. It certainly won’t alleviate the situation, but anything is better than what we have now.

The aircraft have:

• All electric power

• Aircraft lifespan should be over 10 years.

• Room for 1 pilot and 4 passengers.

• Optimized ranges of 20-50 miles for minimum charge time, although they could go up to 100 miles without charging

• Estimated charge times of 10 minutes

And of course, the major innovation here is that while the aircraft looks more like a plane, it actually has the capability to take off vertically like a helicopter. Which allows for the vertiports (aka a heliport for eVTOLs) to take up less space than a traditional airport runway, of course.

Now, you might be wondering why we’re using these eVTOLs in the first place instead of just using helicopters. Well, that’s because helicopters are incredibly loud and not necessarily as safe because helicopters are typically single-rotor vehicles… while eVTOLs have two rotors.

Because eVTOLs are electric and smaller, the noise they make is reduced significantly.

And Archer estimates that eVTOLs are around 100x quieter and cost approximately ⅓ as much to produce compared to your standard helicopter.

The company has two facilities to begin construction of their Midnight aircraft. They already built out a production facility in San Jose, California to create their original aircraft used to attempt to get an FAA certification.

But they also just completed the first phase of their Covington, Georgia facility. Which will be capable of producing up to 650 aircraft per year. There are also plans to nearly triple the square-footage of the location to support a long-term production target of 2,000 eVTOLs per year.

And by contrast to the traditional electric vehicle industry in the automotive space, Archer only had to spend $65 million over the span of 18 months to build this location. That is significantly lower than what most of the EV startups had to spend to have a hope of ramping up production of new vehicles.

And it’s worth noting that Stellantis actually provided some capital, engineering expertise and technology to help build that plant in Georgia. Stellantis is also an investor in the company, owning an approximate 14% stake in Archer. Additionally, they’re going to act as Archer’s contract manufacturer. Which does reduce the risk that Archer fails, since Stellantis obviously has extensive resources.

Another important partnership Archer has is with United Airlines. Which will likely be Archer’s flagship customer and United has helped them in commercialization efforts as an investor in Archer themselves.

A recent agreement has been made with Anduril, the defense contractor, to raise funds as part of a $430 million equity raise, and to form a partnership to explore monetization opportunities in the defense business. The primary goal of this partnership will be to potentially receive a program of record from the US Department of Defense. So, this is another business vertical that Archer could explore, along with the air taxi network.

Archer signed an MOU with Southwest Airlines to operate eVTOLs at 14 airports across the state of California. So, that’s another major airline that Archer has begun to collaborate with.

Combining over $1 billion in orders from United Airlines, $500 million from Japan Airlines, among other customers… Archer’s total order book is valued at over $6 billion. The demand from traditional airlines and other aircraft operators cannot be denied.

In terms of infrastructure, when it comes to vertiports, Archer has three primary agreements in place already.

The first is an MOU deal with Signature Aviation, which operates the largest network of private aviation terminals across the world. They have over 130 assets across the USA, over 200 including other regions, with five initial starting locations shown on the map on screen.

This is a major partnership given the level of access that Archer gains through these existing assets.

The second is with Atlantic Aviation, who will collaborate with Archer to establish locations in Los Angeles, New York, and the larger Northern California and Southern Florida regions. The companies plan on launching some of the initial locations in 2025.

The third infrastructure agreement is with Falcon Aviation in the UAE. Falcon will be Archer’s infrastructure partner at several existing heliport terminals. Again, Archer plans to have some of these locations available as early as this year.

Of course, all of this is ultimately dependent on the company receiving approval to fly and operate their aircraft from the U.S. FAA and other regulatory bodies around the world.

As of Q3 2024, Archer was nearing completion of Phase 3 of the FAA’s certification process, while continuing to advance what is necessary for Phase 4. Which would be the final phase of the process to secure a type certification and ramp up operations.

Back in 2021, Morgan Stanley put out a research report on the eVTOL market, estimating that the total addressable market (TAM) of the sector could be $1 trillion by 2040, and $9 trillion by 2050. That’s a massive market in their base case scenarios.

This assumption basically assumed that Transport & Logistics, as well as Ride Sharing would each represent around 50% of that $1 trillion.

This all sounds great, but keep in mind the major downside of numbers this large. Larger TAMs typically correlate with more competition. Which ultimately drives down margins.

How many companies will eventually maintain market share in this sector remains to be seen, but here is a list of 8 other competitors to Archer, and these are just the public ones.

So, by no means is Archer the only company trying to build an air taxi network.

With that said, while I haven’t researched many of these other stocks yet, it seems like Archer is generally ahead in terms of what partnerships it has managed to acquire. That could ultimately make them an industry front runner, especially when Archer has backers with deep pockets.

In terms of actually making money, Archer’s business model relies on two main verticals:

• Selling their eVTOLs to third-parties.

• Selling ride sharing services

Logistics services and military applications are two other potential markets they could enter, but these two will be their main focus for now.

As far as economic projections, Archer is targeting around 40-50% gross margins, with ride sharing set to make up approximately 80% of their revenue mix.

When comparing an average trip between a typical ride sharing service in a car, versus the air taxis, Archer assumes they will generate approximately $2.4 million per eVTOL. A car ride share would bring in revenues of $136,000 per year.

Given those assumptions, Archer’s management is projecting the company will generate $3.2 billion in annual revenue with 20% operating margins by 2028.

Working through those numbers, that means Archer would have around 1,300 aircraft up and running, bringing in $640 million operating income. Depending on what their net income ultimately came out to, they could easily justify their current $4 billion valuation.

Especially when the market would probably give a company like Archer an insane multiple.

But all of this is based on a variety of assumptions.

As things currently stand, Archer doesn’t have approval to operate in any jurisdiction yet, and the company lost $122 million in operating expenses in Q3 2024. Their last reported quarter.

At the time, the company had $500 million in cash on the balance sheet. This doesn’t include an additional $430 million Archer raised from Stellantis and other partners back in December.

So, Archer should have at least around $800 million in cash, if not more.

It’s worth noting Archer also has an ATM program in place to raise funds, so they’re likely continuously diluting right now as the stock has run up.

Funding isn’t an issue for Archer, not any time soon. It’s just a question of when they will achieve their goals, and how long that might take.

Total liabilities are $183 million, so not a problem with all of the funding they’ve received.

The share count as of September 30th, was 389 million shares outstanding. Including warrants, options, and RSUs, that would add another 72 million to the share count.

This would bring in additional funds, but dilution has been sizable for this company. They will need to continue to dilute for the foreseeable future.

Quickly going over the management team…

While their CEO’s main experience was at a software company, so not particularly relevant from my understanding…

Both the company’s CTO and Chief Engineer have prior experience developing and building eVTOLs at previous firms. So, that’s some pretty rare expertise, I’d imagine.

Additionally, their board of directors features a former CTO of NASA, former CEO of Mitsubishi North America, former CEO of United Airlines, and the Stellantis global head of business development. Plenty of experience in the engineering, automotive, and flight sectors to pull from.

• Why I wouldn’t invest (text list)

Now, would I invest in Archer myself? Probably not.

I just think there are easier investments to make, honestly.

Archer needs to produce over 1,000 aircraft to hit its 2028 financial projections… we’ve seen plenty of companies fail to scale their operations in the automotive sector. This is similarly complex, if not harder.

They need the FAA and other government agencies to approve eVTOLs to operating in major cities. This isn’t necessarily guaranteed, especially since it can vary by jurisdiction.

And I think the central risk is the scalability of the business.

Vertiports could be limited, there’s only room for so many. If there’s too many competitors then the ride sharing business could be difficult to maintain.

Archer has seemingly done a good job of finding ways to reduce costs, but there are just too many unanswered questions for me to feel comfortable with this sector, even if I wanted to buy into capital intensive industries.

With all of that said, if you want to invest in eVTOLs and take that gamble, Archer seems like it would be the most likely to succeed. Given the partnerships it has in place. Although I still need to do more research on other companies in the sector to fully confirm that. I can make some more videos on Archer’s competitors if people would be interested.