Air mobility specialist Archer Aviation (NYSE:ACHR) saw its shares fall sharply, about 6%, despite a spate of positive developments. A manufacturer of electric vertical takeoff and landing (eVTOL) aircraft, Archer just came off better-than-expected results for the second quarter. Also, the company has inked credibility-boosting deals with major enterprises. Still, ACHR stock has printed red ink, likely due to valuation concerns.
At first glance, the selloff appears irrational. Yesterday, Archer posted a loss per share of 32 cents in Q2, beating the expected print of a loss of 33 cents. While that doesn’t sound remarkable, Archer is a pre-revenue enterprise. As such, it needs to manage costs prior to its sales generation phase. Therefore, a mitigation of expected earnings losses is a positive.
More significantly, Archer announced an agreement-in-principle with automaker Stellantis (NYSE:STLA). Per Reuters, the automaker will absorb up to $370 million of labor-related costs to support Archer’s eventual launch of its eVTOL aircraft.
Moreover, as InvestorPlace’s Thomas Niel pointed out, Archer signed a memorandum of understanding with Southwest Airlines (NYSE:LUV) last month. Niel notes that Archer already has a partnership with United Airlines (NASDAQ:UAL) regarding the operation of air taxi routes. All these events suggest that ACHR stock should rise in value.
So, why is the equity falling?
Valuation Concerns Cloud ACHR Stock
For context, it’s not the first time that ACHR stock tripped up. In the trailing month, shares have suffered a decline of more than 11%. Since the beginning of this year, Archer has faded about 35% in the charts. As a result, short interest or bearish wagers against the eVTOL specialist have spiked.
According to Fintel, the short interest of ACHR stock stands at 28.08% of its float. In addition, its short interest ratio — or the number of sessions necessary to unwind all bearish bets against ACHR based on average trading volume — comes in at 9.29 days to cover.
What may be causing this skepticism against ACHR stock is its projected valuation. Analysts estimate that in fiscal 2024, Archer may post revenue of $2 million. By 2025, this figure could skyrocket to $55.08 million. Further, the most optimistic target calls for $78 million. Assuming a shares outstanding count of 302.75 million, ACHR would be trading currently at about 14.7x projected high-side 2025 sales.
The average price-to-sales ratio of the underlying aerospace and defense industry sits at 1.72x.
As TipRanks’ Vince Condarcuri pointed out, due to Archer’s relatively limited cash on hand, “it will likely continue to rely on equity financing to fund its operations, which will dilute the value of the current outstanding shares.”
Such dilution risk threatens to make the projected valuation of ACHR stock even worse, thus explaining the downturn.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
