Can Archer Aviation Make You an eVTOL Millionaire?

Electric air taxis -- otherwise called electric vertical takeoff and landing (eVTOL) aircraft -- have entered the investor zeitgeist. Many companies are aiming to build this innovative transportation vehicle, and perhaps none more aggressively than Archer Aviation (NYSE: ACHR). The start-up has raised billions of dollars and is aiming to sell its vehicle for air taxi networks around the world.

Investors have hyped up this pre-revenue stock, driving up the price by 226% in the last 12 months alone. Will Archer Aviation stock help make you a millionaire? The story is more complicated than you think. Here's why Archer Aviation is a high-risk stock that investors should be heedful of buying today.

Raising funds for point-to-point transportation

Archer Aviation is a manufacturer building an eVTOL called the Midnight. Powered by electric batteries, this aircraft will have a pilot and four passengers that can take off vertically like a helicopter, but with minimal noise disruptions. It will be able to travel through the air to point-to-point destinations, which will be operated by Archer Aviation and its partners such as United Airlines. It is also working with partners internationally to build air taxi networks, including Abu Dhabi Aviation.

The promise of eVTOL air taxis is enabling passengers to avoid traffic on busy routes, such as going from Manhattan to the airport. Archer is betting there will be insatiable demand for this product, and likely at a premium price. Many cities around the globe are ensnared in persistent traffic jams. The Midnight aircraft promises to relieve the pressure.

That is, if the aircraft is approved by the Federal Aviation Administration (FAA). The FAA is 15% through its final verifications on the Midnight, which has already gone through a successful test flight with one of its propellers not working. More testing is to be done, but Archer Aviation looks to be on the path to FAA certification at some point in the near future, albeit without an exact date.

In the meantime, the company is not generating any revenue and burning cash. Management has raised a lot of money in the capital markets, most recently an $850 million stock offering at a $10 share price. The company now has $2 billion of liquidity, which will give it a few years of runway at its current annual burn rate of $450 million in free cash flow.

Image source: Getty Images.

Unit economics and growth potential

The Midnight aircraft is reportedly being sold for around $5 million a unit, or will be used directly by Archer Aviation with one of its aviation partners. This is nowhere near the cost of a commercial airplane, but the Midnight Aircraft is a bit different. It still has a pilot, who will need training and a salary, but only four passengers.

In order to make up for pilot, energy, and depreciation costs, these air taxi tickets will need to be fairly expensive. Let's assume that a typical Midnight air taxi gets used 10 times a day with a full passenger load. That is 40 tickets sold to customers for a short 10-minute trip.

At $100 a pop, that turns into $4,000 in daily revenue. Multiplied by 365 days a year -- this is assuming full capacity year round -- and you get $1.46 million in annual revenue. It would take a taxi operator close to four years to break even on a $5 million purchase before considering operating costs like hiring a pilot.

Call me skeptical that Archer Aviation can sell a $100 ticket on its air taxis. It may have to be closer to $250 a ticket, putting it close to the price of an airline ticket. How many people are willing to pay up to skip the traffic? Time will tell.

To be clear, there is a lot of growth potential for Archer Aviation and other eVTOL stocks. Customers would line up out the door to turn an hour-long trip in traffic to a 10-minute ride above the city. That is, if the routes can be operated profitably while selling tickets at a reasonable price, which is still a major uncertainty with this business.

ACHR Free Cash Flow data by YCharts

Is Archer Aviation a millionaire maker?

The hype around eVTOL stocks has reached close to fever pitch. Even though it generates zero dollars in revenue, Archer Aviation now has a market capitalization of $6.5 billion -- and this is before considering the dilution coming from its most recent capital raise. The company is burning $450 million in free cash flow a year in order to scale up its manufacturing capabilities and has not sold a single product to a customer.

Management can talk all it wants about bringing point-to-point air taxi networks to cities around the world, and even for the Los Angeles Olympics in 2028 (which it plans on doing). But with the unit economics discussed, Archer Aviation is trying to thread the needle in order to scale up its operations and generate a profit for all stakeholders. Even if it does end up selling a bunch of air taxis every year, a $5 million price point would only get you to $500 million in revenue at 100 annual units. Profit margins will likely be slim and not get the stock to a reasonable price-to-earnings ratio (P/E).

At a large market cap for a pre-revenue stock, Archer Aviation does not look like a millionaire maker for your portfolio. On the contrary, it looks like a good way to lose a million dollars.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.