69% off, is this Cathie Wood stock a bargain at just $3?

You may recall that a few years ago many companies took a non-traditional route to going public. Special Purpose Purchase Companies (SPACs) — more colloquially called “blank check companies” — have become a popular method of pursuing an initial public offering. An influential player in the SPAC boom was a billionaire venture capitalist named Chamath Palihapitiya. Palihapitiya is a prominent tech investor and has a closely followed social media presence, largely due to his popularity all in podcast.

Palihapitiya’s support of SPACs may have contributed to the illusion that many of these businesses were profitable investment opportunities. The unfortunate reality, however, is that many SPACs were far less mature and financially stable than most companies that followed the more traditional IPO process. As a result, a lot of money has been lost investing in SPACs.

One SPAC stock that has fallen substantially since its IPO is an electric vehicle (EV) business. Archer Aviation (ACHR 5.81%). A hallmark of Cathie Wood’s ARK Invest exchange-traded funds (ETF), Archer develops electric vertical take-off and landing (VTOL) vehicles.

Is the market underestimating the potential of Archer’s flying taxis, making the pronounced sales and $3 share price a profitable opportunity hidden in plain sight? Let’s explore Archer’s market potential and assess whether now is a good time to pick up some shares.

What problem does Archer Aviation solve?

Public transport is a market ripe for disruption. Transport applications such as those created by Uber technologies and Lyft has completely revolutionized the way people travel, especially in urban environments. The idea of ​​an on-demand driver who can pick you up and drop you off at a destination brings a level of convenience and solves supply and demand constraints that traditional taxi services simply cannot replicate.

But despite the convenience of hailing an Uber or Lyft, there’s one problem those companies can’t really solve: getting stuck in traffic. Congested roads aren’t something a ride-share can magically make disappear.

Archer seeks to introduce another layer to urban mobility. Its electric vehicles are essentially air taxis. In theory, this method of travel can lead to fewer cars on the road, while serving as a greener form of mobility.

Outside of urban air mobility, Archer also has real opportunities it is working on with the US military as well as various airlines.

According to Precedence Research, the total addressable market (TAM) for electric VTOL aircraft will grow at a compound annual growth rate (CAGR) of 12.4% between 2023 and 2032 — eventually reaching a size of 35.8 billion dollars by the beginning of the next decade.

All these points can inspire some confidence and give the impression that Archer is destined to land somewhere between Uber and adze. Unfortunately, there is a world of difference between investing in idea of something and investing in the business itself.

Image source: Getty Images.

It takes money to make money

For both electric vehicles and aircraft, assembly is an expensive endeavor that requires research and development (R&D) and capital expenditures (capex).

The financial profile illustrated below is a little confusing at first glance. Although research and development expenses continue to rise and net losses continue to increase, Archer’s cash balance has increased from its low points. This is quite strange considering that Archer is pre-arrived.

ACHR Research and Development Expenditure Data (Quarterly) by YCharts.

There are a few ways Archer has been able to keep its liquidity afloat while constantly burning cash. The company has a number of strategic relationships with other aircraft companies. Stellarfor example, he works closely with Archer on the production side and has been a strong financial supporter of the business.

In addition to these investments, Archer more recently relied on a $175 million private equity public investment (PIPE) from Stellantis and United Airlines. While this solves short-term liquidity problems, the opportunity cost of such a transaction dilutes Archer shareholders.

Should you invest in Archer stock at $3?

At the time of writing, Archer boasts a market capitalization of approximately $1.1 billion. Since Archer has $6 billion worth of purchase orders, the valuation might seem like a steal.

However, I just didn’t buy Archer’s whole narrative. In general, I don’t think buy orders have much value. Given that Archer is still working with the Federal Aviation Administration (FAA) on its commercialization efforts and there are question marks over its mass production and manufacturing capabilities, it’s hard to argue that Archer stock is simply cheap because it’s “only” $3.

Also, I think Archer might not fully reach a sizeable scale. It’s hard to believe that the same number of people who can afford an Uber will also be able to access a flying taxi if needed; from afar, it looks like a luxury and a niche service. If you’re curious why Archer might be forcing Cathie Wood, I’ll theorize that her stock position is an industry basket approach, as ARK also owns shares of Joby Aviation — one of Archer’s closest competitors.

For all these reasons, I think Archer is too speculative for most investors right now. While a $3 share price might make the company look like a very cheap opportunity, it’s hard to justify a $1 billion valuation on a zero-revenue, high-cash-guzzling company outside of financial lifelines from larger companies that may eventually withdraw and questionable. long-term viability.