The last couple of years have been a roller-coaster ride for investors. Back in 2022, inflation reached abnormally high levels, which caused the Federal Reserve to pursue an aggressive interest-rate hike strategy. Unsurprisingly, investor enthusiasm waned, and stocks cratered in an epically precipitous fashion.
But as always, the capital markets demonstrated their resiliency last year. Thanks to advancements in hot areas such as artificial intelligence (AI), a booming new spin on the weight loss market in the pharmaceutical sector, and an improving macroeconomic picture, investors gradually adopted a more bullish mindset, and stocks started bouncing back.
This rebound carried into 2024, with the S&P 500 and Nasdaq Composite gaining 23% and 29% so far this year, as of market close on Dec. 18. One thing to be cautious about in a bull market, however, is that some stocks tend to experience upward momentum that may not be fully warranted.
So far this year, shares of electric air taxi manufacturer Archer Aviation(NYSE: ACHR) have soared by 38% — trouncing both the S&P 500 and Nasdaq by a considerable margin.While this may give the illusion that Archer is a no-brainer opportunity, investors should be aware that the company is still very much in its infancy.
In fact, while it’s garnered a lot of attention from big-name brands in the commercial airline industry, Archer remains a pre-revenue operation and is not yet commercially scaling its vehicles. For this reason, I’d argue that much of the gains in Archer stock during 2024 are rooted more in hype and a bullish sentiment surrounding the electric vehicle (EV) more broadly.
Nevertheless, the company just announced what could be a game-changing partnership. Below, I’m going to explore an opportunity that I think is flying under the radar and assess why Archer could emerge as a leader in the long run.
In early December, Archer announced a strategic partnership with defense technology start-up Anduril. Anduril specializes in autonomous systems for the defense system, specifically a series of drones that are meant to be used for reconnaissance missions across land and sea.
Of note is that Archer has already received significant interest from the U.S. military. Given the low noise emissions from EVs, the military could potentially benefit from using Archer’s aircraft during stealth operations.
To me, joining forces with Anduril not only strengthens Archer’s existing footprint in the public sector but also adds a great source of legitimacy surrounding the company’s progress as it eyes commercialization — making a position in the stock quite tempting right now.
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As I’ve expressed numerous times, military operations is an incredibly overlooked part of the artificial intelligence realm. As far as software applications are concerned, I see Palantir Technologies as the de facto leader for the U.S. Military.
With that said, the defense industry has many use cases outside of software and data analytics. According to Allied Market Research, the global total addressable market (TAM) for stealth operations technology is currently estimated to be worth $45 billion. Allied estimates that the market will continue growing at a compound annual rate of nearly 7% between 2024 and 2033 — reaching a size of $79 billion by early next decade. Furthermore, the market for military robotics and autonomous systems is expected to nearly triple in size over the next decade — reaching $32 billion by 2032.
As you can see, Archer is now looking at an opportunity in the public sector that could be worth more than $100 billion by early next decade. I think the company’s partnership with Anduril will help accelerate its potential with the U.S. government while also diversifying the business model beyond working with commercial airline business.
Considering that the company has yet to generate any revenue, placing a value on a cash-burning business is always more of an art than a science. Currently, Archer’s market capitalization is $3.6 billion. Moreover, according to the company’s latest shareholder presentation, Archer boasts a purchase order book in excess of $6 billion. If I use the company’s purchase orders as a proxy for revenue, then Archer’s implied price-to-sales (P/S) multiple would be roughly 0.5.
While this might suggest that Archer stock is a bargain, I’m personally not comfortable relying on the above analysis. Purchase orders do not always translate into revenue, and order amounts can change at any moment. Furthermore, Archer still needs to overcome a number of regulatory hurdles before the company really starts to scale.
At the end of the day, I see the deal with Anduril and Archer’s pursuit of the defense industry as a major accomplishment and source of validation for the company’s long-term ambitions. But with that said, I still see Archer as largely a speculative opportunity heading into 2025.
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Adam Spatacco has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
