‘Very few downsides to settlement for Archer’
It was Chinese General Sun Tzu who said: “Keep your friends close and your enemies closer”. Something Archer and Wisk seemed to do last week when they announced a settlement and surprise collaboration to end a long-running legal battle.
Despite last month’s push for an extension, from a high-level the resolution came much sooner and more favourably than expected, according to Edison Yu, director and research analyst at Deutsche Bank. Boeing has come onboard with Archer’s investors as a participant in its latest capital raise worth $215m alongside United, Ark, Stellantis and others. Whilst Archer is planning to integrate Wisk’s autonomy technology into future aircraft models. Boeing also received warrants that could increase their stake by up to 13.2 million shares.
“Firstly you now have Boeing onboard as an investor,” Yu tells us. “Essentially your foe is now an owner of the stock. I would have expected something to be much more dragged out and eventually you could have seen a lot of bad PR. But instead you have Boeing onboard, which is very rare these days if you think about two arch enemies coming together like this.”
The second factor is that the feud didn’t go to court. Although no figures have been disclosed, Yu estimates legal fee savings in the tens of millions. “Which may be trivial for Boeing, but is not trivial for a company like Archer. You could funnel those savings into R&D or infrastructure development.”
There was a lot of talk around the use of Wisk’s autonomous technology in future iterations of Archer’s aircraft. Yu thinks that is a “long-term positive” that will have little impact for several years. “Eventually, if regulators allow autonomous operations to happen, having access will save Archer on R&D costs.
“But near-term, I think the first two factors, Boeing’s investment and keeping the litigation out of court, are quite positive,” he says.
Autonomy is “tricky” from an investment angle, according to Yu. Using the example of autonomous driving, that market has been talked about for the best part of a decade with a high startup failure rate. The success stories are probably Waymo and Cruise. Both firms now have permission to offer 24/7 driverless rides commercially in San Fransisco. But that is just two firms in one city.
“I realise that in the air it is easier to go autonomous versus the ground because there is less traffic and fewer corner cases. But it is hard to give much credit from an investment perspective as there is just so much regulatory uncertainty over when this could happen,” says Yu. He thinks Boeing plans to use the technology for a number of other aircraft. “They don’t really care a lot about eVTOL per se, they care about using the technologies involved across lots of different aircraft.”
So does this settlement boost Archer’s position in the race to be first in the US with Joby? Does being first even matter? There are two elements to this ‘race’: the type certification with the FAA and work with the US Department of Defense (DoD).
On the DoD elements, it sounds as though Archer could beat Joby to the start line, according to Yu. “I don’t have any more information from the military side than what Archer said in their earnings call last week, but I think it is close. Even if they are a few months apart, I think it only really matters from a purely headline perspective. From the stock perspective, it sounds very close and I think both will get credit for it if they are close.”
As per disclosures on its Stage 3 certification plans with the FAA, Yu thinks Joby is ahead by a couple of months. But he expects Archer could catch up significantly during the testing phase in Stage 4. “Ultimately, can Archer make up enough to catch up? I am not sure. But I do think from an investment point of view it won’t have much impact, because Joby’s significantly higher valuation [$5.32bn vs. $1.39bn (August 2023)] infers the market already believes Joby will be ahead,” explains Yu.
The less-reported, but equally important challenge facing the likes of Archer and Joby is turning a profit. How easy this is to do depends on how an OEM decides to sell its aircraft, says Yu. The profit profits of selling aircraft to an operator compared with operating the fleet yourself are very different. “For me, Archer’s plan is more de-risked,” says Yu. “They’re selling to United Airlines and getting the profit right up front. But Joby physically has to run the fleet themselves in the US. Delta will feed them customers but Joby operationally has make those numbers work. Depending on the adoption curve you could be burning through a lot of cash.
“If you’re not on the hook for the fleet I think that is much more de-risked because the utilisation levels early on I don’t think are going to be high. Yes, airport should in theory be popular but I don’t think we truly know how open the customers will be at the onset,” says Yu.
If you look at the history of Archer, when they first started working with Stellantis it was back before FCA and PSA merged. The relationship has grown from small beginnings as it has with United too. “A best case scenario could look like this,” explains Yu. “Boeing having never worked with Archer now has a small stake in it. Once you start seeing the level of execution and practicality and competency of the team there you can believe they have found an alternative approach [versus Joby]. Boeing in theory could take on a larger role which could have a lot of positive halo effects.” But even it doesn’t, as long as the cards fall right with respect to getting to market, Archer is proof of an alternative pathway.
“It feels like there is not much downside to the settlement. Yes, Archer is taking some dilution and as an investor you never want to take too much. But I think in this case it is well worth it to solve two problems at the same time,” concludes Yu.
Aside from his famous quote on enemies, General Tzu also did not advocate war. If one had no choice, he said, it was better fight quickly because prolonged wars are harmful even for the victor. Now, with court avoided, it looks as though a few libraries local to San Jose will be getting their copies of The Art of War (potentially annotated) back from a long-loan.