Archer Aviation Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Archer Aviation Inc. is a company focused on designing and manufacturing electric vertical takeoff and landing (eVTOL) aircraft for urban air mobility (UAM), aiming to transform how people move in and around cities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Archer Aviation is developing eVTOL aircraft, a form of electric-powered aircraft capable of vertical takeoff and landing, for urban air mobility. They aim to offer an alternative, more efficient and sustainable mode of transportation in congested urban areas. Their primary business model focuses on designing, manufacturing, and selling these aircraft to airlines and other operators in the urban air transport market.

  • Revenue Streams: Archer’s revenue is anticipated to be derived from aircraft sales and related services such as maintenance and support. Initial revenue may come from prototype and early models, with more stable revenue expected as production scales and the UAM market develops.
  • Industry Trends: The UAM sector is a developing market with considerable interest and activity, but the competitive landscape is intensely forming. Key market drivers include advancements in battery technology and autonomous flying, the increasing need to reduce carbon emissions, and rising urbanization. The challenges for this industry include securing FAA certification, navigating regulatory complexities, and scaling production while maintaining safety. Many companies including Joby, and Lilium are also developing aircraft.
  • Competitive Landscape: Archer is in a competitive space with other companies also building eVTOL vehicles, some of whom have more funding or are further along in development. Competing companies such as Joby and Beta are similarly pursuing development, and the market is still in the very early stages, so success is by no means guaranteed.
  • Differentiation: Archer is aiming to differentiate itself through a “design for manufacture” approach, in order to scale quickly and meet demand. They also claim to prioritize safety and focus on real routes to make UAM accessible. They are developing technologies to make the aircraft quieter and more affordable and more practical to use.

Financials Overview Archer Aviation is still in a pre-revenue stage. The information provided is from recent quarterly filings. * Cash Position: Archer has significant cash reserves with $411 million of cash and cash equivalents as of September 30, 2023. In Q3 2023 they spent $187 million in operations and $17 million in capex. This gives them runway for only 5-7 quarters. * NOTE: From this and past reports it’s clear that the management knows this and is working actively to secure further funding, given they are spending cash at such a high rate.

  • Profitability: The company is currently not profitable and not even generating meaningful revenue. They are focused on R&D and testing. Their largest expenses currently are around research and development and other administration expenses, that shows that this is a pre-revenue company that is investing on the future, but it also means that they are losing lot of cash.
  • Debt Archer has $38 million in debt.
  • Shareholder Equity Their market equity was $1.5 billion at the time of filling the Q3 2023 report.

  • Key Concerns: There are significant questions about whether they can raise funding quickly enough to continue operations, get their aircraft certified by FAA and achieve production at scale with low operating costs and high performance.

  • Moat: 2/5 - Weak

Archer’s moat is weak for the following reasons: * Low Switching Costs: The end customer in urban air mobility has the option to use another form of transportation, and the technology that they are using might seem to make one offer more desirable than another; but the business isn’t different in such a way that the consumer is forced to use them or the service they provide is inherently superior to others. * Limited First-Mover Advantage: Even though they are well positioned to capitalize on the UAM market, any company with better technology, a better supply chain, or any other advantage, can disrupt them. Therefore, there is little first-mover advantage here since they don’t have a large userbase, and that they are still in pre-production. * NOTE: The UAM market is still very young, making companies not have established user bases that create a significant competitive advantage. The network effect is not in play here since most companies will be directly competing on the services provided and the network effect only appears if consumers can’t use the aircraft individually. * Limited Network Effects: Since the service they provide are mainly air transport, the network effects aren’t very strong. They do have some positive qualities: * Regulatory Approvals: There are very few companies that can achieve FAA certification, given the complexity. This does reduce competition, because it creates a difficult hurdle for competitors to get over. However, there is a lot of competition in the UAM sector, so it might not be a particularly strong moat. * Brand: Archer is currently trying to position themselves as one of the big players in the UAM sector, and the brand awareness could give them some advantage in the future, however, this is not set in stone, so more of a positive than a moat at this point.

  • Mistaken Moats: There are some claims that one can mistake for a moat, but does not constitute a moat.
    • Strong Management: Currently, the management appears to be making correct decisions, to have vision, and to focus on the right things; however, this doesn’t provide a moat, as managerial talent can always be acquired by competitors. A bad decision or a mistake can also turn that into a major disadvantage for the company.
  • Risks that Could Harm the Moat and the Business Resilience
  • Technological Disruption: The risk of new technology displacing or disrupting the need for Archer’s aircraft is high, as the company depends on the current technology and the assumption that it’s the best for the market. Any new technological advancement that is better in any way would significantly affect their profitability and future.
  • Regulatory Hurdles: The FAA is slow-moving and the regulatory environment is evolving. If regulations are put in place that restrict the company’s plan or put it at a disadvantage, it would also significantly hurt their future.
  • Cost and Manufacturing Scaling: Scaling production while maintaining costs is difficult. If they are unable to produce aircraft at scale with profits, they might not survive.
  • Competition: Many firms are looking at entering into the UAM market. An existing player might become the leading provider in this market due to factors not related to technology. And a new company might always come and disrupt the existing structure.
  • Funding Issues: Due to the high operating costs, the company is dependent on external funding. Any drop in the ability to raise money will hinder their capabilities.
  • Management Issues: There is a high degree of personnel turnover, especially at the management level, that makes the company vulnerable to new direction. Their strategy might be sound in theory, but it can be hindered by a management team that fails to implement the correct steps. There are also ongoing legal proceedings regarding management, that can also be detrimental for the company’s future.

  • Public Opinion: Any fatal accident or major issue with safety will destroy the market in a few days, as a lot of public’s support depends on safety and affordability.

  • Understandability: 3/5 - Moderately Complex The general idea behind the company, providing air transportation in the city, is easy to understand. However, the technology and the underlying complexities of the aerospace and aircraft industry is not well understood by a regular investor. There is also considerable understanding needed of business strategy, marketing, and future trends in the industry that may be difficult for general investors.

  • Balance Sheet Health: 3/5 - Fair
  • As of September 30, 2023, the company has $411M in cash, which is substantial for operations in the short term. But, they are burning cash every quarter and will soon need to raise additional funds.
  • The company has only $38M in debt. Their liabilities are quite small when compared to their assets, but they are all related to deferred tax or lease obligations, which are low priority.

  • Current Assets is $461M and Current Liabilities is $78.5M. This puts them at low risk in the immediate future. * NOTE: While the overall structure is okay, the company is not generating meaningful profits, and is currently in negative equity, but given its status as a pre-revenue company, it’s an adequate rating for a company in their stage of development. * NOTE: This rating of the balance sheet might become worse, if the company’s cash reserves dwindle and if they are unable to procure financing.

  • Recent Concerns / Controversies and Problems

    • Legal Action: There have been many legal cases filed against the company by ex-employees. One of the most damaging is an accusation by Wisk Aero LLC (a competitor) about intellectual property theft, that has caused investors to question the integrity of the company and its executives. While this has had little effect on the operations, it is still a concern as this legal process could take time and be costly, which can be damaging for a pre-revenue company.
    • Delays and Certification: The certification of the aircraft by the FAA has been delayed. There have been several pushbacks from the FAA, which has made some investors doubt about the capabilities of the company to achieve regulatory approval. Furthermore, the company also announced delays in the planned manufacturing schedule. Such delays may have a cascading negative impact on the company’s future, and that’s why it requires more scrutiny.
    • Competition: Several companies are pursuing the same goal of urban air mobility. This puts Archer in a position of increased competition, that may result in lower returns and a faster depletion of the company’s cash reserves. There is a legitimate threat of a new competitor coming and becoming the market leader due to better technology or manufacturing processes. This risk makes the potential of the moat significantly lower.
    • NOTE: The management are aware of all these factors and are working to mitigate them by accelerating the manufacturing and testing processes, getting certification as soon as possible, improving operational efficiency, and creating a customer base before competitors become dominant. However, they are far from eliminating or reducing them.
    • Personnel Changes: There has been a lot of personnel and management turnover in the company. This adds to the uncertainty of the company’s future, because frequent changes in the strategy and the people behind them might affect the outcomes. The company has seen some key management members leave during recent quarters. These personnel turnover concerns are a negative sign.
    • Overall Market Turmoil: Given the current state of the market, any company that has a high debt/asset profile, has low or negative profitability, is a more dangerous investment. Archer is a company that is highly dependent on external funding, and that’s why any changes in market conditions can negatively affect it.