Better Buy: Archer Aviation vs. Rocket Lab USA

Archer Aviation (NYSE: ACHR) and Rocket Lab USA (NASDAQ: RKLB) are both tiny aerospace companies that went public by merging with special purpose acquisition companies (SPACs) in 2021. Both stocks initially soared, but they crashed after the companies missed their pre-merger estimates and racked up steep losses.

Archer Aviation and Rocket Lab USA now trade roughly 80% and 60%, respectively, below their record highs. Could either of these unloved stocks take off again?

Image source: Archer Aviation.

Archer Aviation wants to replace helicopters

Archer produces electric vertical take-off and landing (eVTOL) aircraft which are cheaper, greener, quieter, faster, and easier to land than traditional helicopters. Its Midnight aircraft, which is mainly designed for air taxi services, can ferry small groups of passengers at a maximum speed of 150 miles per hour for up to 100 miles.

Archer competes against larger aerospace companies like Boeing, automakers like Toyota, and other start-ups in this nascent market. But in 2021, United Airlines (NASDAQ: UAL) placed a $1 billion order for 200 of Archer's eVTOL aircraft. In 2023, the automaker Stellantis (NYSE: STLA) invested in Archer and selected it as the exclusive contract manufacturer for its own eVTOL aircraft. Archer also secured additional contracts with the U.S. Air Force and Future Flight Global.

Those orders and contracts generated a lot of excitement for Archer even though it hadn't commercialized a single aircraft at the time of its public debut. It finally delivered its first eVTOL aircraft to the U.S. Air Force this August, but analysts expect it to only generate $2 million in revenue for the full year as it racks up a net loss of $454 million. That's well below the $42 million in revenue it originally planned to generate in 2024.

But looking ahead, Archer believes it can produce 10 aircraft in 2025, 48 aircraft in 2026, 252 aircraft in 2027, and 650 aircraft in 2028. Based on that optimistic outlook, analysts expect Archer to generate $40 million in revenue in 2025 with a slightly narrower net loss of $443 million. However, that's still a lot of red ink compared to its $360 million in cash and equivalents and $150 million in total liabilities in its latest quarter. It's also increased its share count by nearly 50% since its public debut, and it will likely continue to dilute its shares with more secondary offerings if its coffers run dry.

Rocket Lab USA wants to become the next SpaceX

Rocket Lab develops partially reusable orbital rockets. Its Electron rocket, which has already been launched 53 times over the past seven years, can be used to carry smaller payloads of about 250 kilograms into space.

Rocket Lab's Electron is less powerful than SpaceX's Falcon, which can carry up to nine times that weight. But its next rocket, Neutron, should surpass Falcon with maximum payloads of 15,000 kilograms when it arrives next year.

In other words, Rocket Lab is focusing on underserved niches of the space transport market instead of going head-to-head against SpaceX. It operates three dedicated launch pads and serves a wide range of customers like NASA, the U.S. Space Force, the Swedish National Space Agency, Capella Space, and BlackSky.

It launched six Electron missions in 2021, nine in 2022, and 10 in 2023. Its revenue soared sevenfold from $35 million in 2020 to $245 million in 2023, but that still slightly missed its pre-merger target of $267 million. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin also came in at negative 37% in 2023, well below its original forecast of positive 10%.

Those numbers disappointed Rocket Lab's investors, even though it signed an additional 17 launch contracts in the first half of 2024. It's also been expanding its core space systems division, which generates higher gross margins than its launch services division, to stabilize its business and narrow its losses.

Analysts expect Rocket Lab's revenue to soar 74% to $425 million in 2024 and grow 40% to $597 million in 2025. But they're also bracing for net losses of $189 million in 2024 and $124 million in 2025.

Rocket Lab still had $345 million in cash and equivalents at the end of its latest quarter, but it was also shouldering $733 million in liabilities. On the bright side, it's only increased its share count by about 11% over the past three years.

The valuations and verdict

With an enterprise value of $920 million, Archer Aviation still looks expensive at 23 times next year's sales. Rocket Lab, which has an enterprise value of $4.3 billion, looks more reasonably valued at seven times next year's sales.

Archer might scale up its business more rapidly than Rocket Lab -- but it's only delivered a single aircraft, it's posting steeper losses, and it's diluting its shares at a faster rate. Rocket Lab's business is more stable, its net losses aren't eclipsing its revenues, and it isn't aggressively issuing new shares. Those strengths, along with its lower valuation, make it a better buy.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Rocket Lab USA and Stellantis. The Motley Fool has a disclosure policy.