May 5, 2021
[6 min Read]
Atlas Crest Investment Corporation ($ACIC) recently entered into a business combination agreement with Artemis Acquisition sub-Inc., which is a subsidiary of Atlas Crest and Archer Aviation Inc. This deal has an implied equity value of Archer of $2.525B, and a pro-forma enterprise value of $2.7B
PIPE (Private Investment into Public Equity) investors committed $600M towards this deal and received 60M shares for $10/share. These PIPE investors are not subject to any lock-up period. This will result in high volatility when the stock opens for trading as there will be a lot of investors who want to invest in this company on their public debut, however this will be combatted by the PIPE investors selling off a portion of their shares for a quick profit.
The warrants and their associated common shares will be locked-up for 30 days after the merger is consummated. Furthermore, the shares owned by the founders/employees will be locked-up for one year after the merger. Lastly, there will be a 6-month lock-up for the sponsor share (shares owned by Artemis Acquisition Inc.). These days are important for investors as there could be large sell-offs on these days, which could decrease the share prices temporarily.
The merger is expected to take place in Q2 2021, and the anticipated ticker for Archer is $ACHR.
Archer designs and develops eVTOL (Electric Vertical Takeoff and Landing) aircrafts for use in Urban Air Mobility. Archer is building the world's largest urban air mobility company, and already have $1B in orders from United Airlines ($UAL), with the option to purchase $500M more. Archer has a very experienced team, that has amassed over 200 years of eVTOL development experience. Archers vision is to improve mobility and drive the world towards a zero-emission future.
Archer's main product is their Maker (image linked below), which is U.S FAA certified and can carry 4 passengers. The Maker will cost consumers $3.30/Mile transported; this is comparable to the prices of an UberX. The Maker can reach speed of up to 150 MPH, which can help make their trips up to 10x faster than a car. Furthermore, the Maker (45DB) can be up to 100x quieter than a helicopter. Archer is able to achieve all if this while maintaining zero emissions.
Archer is a pre-revenue company and expected to start earning their revenue in 2024. Archer has predicted a revenue of $42M in 2024, and this will translate into an EBITDA of -$147M, however they are forecasting an EBITDA of $255M the following year (2025).
Archer estimates their Total Addressable Market (TAM) to be $1.5T in the future, representing on of the largest potential global markets. Archer has built their business model in order to take advantage of this market and to gain market share. Archer has built two main streams of revenue Archer Direct (Aircraft OEM Business), and Archer UAM (Aerial Ride Sharing). Their Archer Direct business model will consist of manufacturing and selling their aircrafts, similar to what they have already done with United Airlines. Archer is already exploring the prospect of future contracts for cargo with the Department of Defense (DoD). The Archer UAM business model is essentially an Uber of the Sky, this would work best in heavily congested cities (Los Angeles, Toronto, Orlando etc.). Archer plans to move people within 100 miles in the city limits and beyond. As this UAM business model scales their infrastructure and networks will improve and accommodate hundreds of takeoffs and landings per hour.
An example that Archer gave in their investor's presentation about the efficiency of Archer's transport was in New York. Archer found that their average time to complete a trip form New York City to JFK International Airport was 7 minutes, whereas the average Uber trip took 85 minutes. Furthermore, the Archer would've costed $50 for this trip which is $26 cheaper than the Uber X option ($76).
Archer estimates that eVTOL can generate 18x more revenue than a ride sharing car. This is because eVTOL is cost-efficient, faster, more convenient, and requires minimal new infrastructure. A picture will be linked with this article comparing the two methods.
The Urban Air Mobility is projected to be a highly profitable and massive industry. Archer estimates that the urban air Mobility business will be 3x more profitable than their direct OEM sales. Furthermore, they are projecting their operating income margins to be somewhere in the range of 40-50% which is very high.
Some research agencies have said that the Urban Air Mobility Industry will be valued up to $104.4B by 2035 and will have a CAGR of 27.37% between 2023-2035. Some notable competition in their space includes Airbus, Lilium, and EHang.
Archer has future plans to autonomize their fleet of UAM aircraft to maximize their scaling and growth potentials. Autonomizing their fleet will free up space for another passenger (increasing margins), reduce their operating costs (because there is no pilot) and reduce the possibility for human errors (increasing safety). Furthermore, by 2026 Archer plans for high volume manufacturing in which they will be able to manufacture more than 5000 aircrafts per year. These aircrafts will go towards their partners United Airlines and Stellaris. Archer will leverage some of their employee's mass production expertise in the automotive industry and apply it to the eVTOL industry. Archer will be able to achieve this high production through their composite materials and processed.
Investment Plan and Valuation:
In Archer's Investors Presentation they provided projected statements which I used in my DCF model. Furthermore, I used two different WACC to discount Archers future cash flows, these WACC's were 8% and 10%. These figures were retrieved from IATA's “Economic Performance of the Airline Industry” document. Lastly, I retrieved the shares outstanding from Excel's “Stocks” function. Everything said and done, the DCF model estimated a fair price between $39.27-$45.71 (using the 10% and 8% WACC respectively). This implies a potential upside of between 296.68% and 361.67%. (BOTH OF THE DCF MODEL'S WILL BE LINKED BELOW AS IMAGES)
Furthermore, another method of valuation I used was a Comps analysis. In this analysis I compared Archer to other public Urban Air Mobility companies, who are of similar market cap. By comparing Archers EV/Sales and EV/EBITDA multiples to the multiples of Lilium and Joby Aviation, I found that Archer is currently undervalued by between 4.76% and 16.67%. Taking this into consideration, Archer's (currently $ACIC) share price should be between $10.36 and $11.53.
Using these valuation techniques, we should expect a shorter-term price target of around $11, and as Archer gets closer to becoming profitable or earning revenue, we can expect a price of around $40-$42.
Currently, the share price of Archer ($ACIC) is $9.89, this price is below the valuation which the PIPE investors received. In my eyes anything below the $10 price (paid by PIPE investors) is an obvious buy. Furthermore, buying $ACIC shares at or below $10.36 is a strong buy, and anything between $10.36 to $11.53 is a good buy.
If the price somehow blows past these prices soon, I will hold off on buying until they return to this price range.
I see this play as a long-term hold, especially if the projections that were put out on the Investor Presentations are even close to being correct. If these projections are correct, the profit that these companies will make between 2030 and 2040 would be insane, and the valuation of the company would reflect that.