Electric helicopters could replace rideshares. How to invest in this 'evolutionary' technology

Published Sun, Jul 23 20236:35 AM EDT

Wall Street is often wondering what the future will look like — and how to invest in the companies that will power it. Electric helicopters fit this theme and recently received a good bit of investor attention. The official label is for these aircraft is an electric vertical take-off and landing vehicle, or eVTOL. (If it prompts visions of the flying cars from beloved movie franchises such as "Back to the Future" or "Harry Potter," you aren't too far off. The idea is to essentially fuse technology from electric vehicles and traditional helicopters.) If the technology can become cheap enough, some see this as the future rival to rideshare platforms. At the end of the day, the best way to avoid street congestion in growing cities is to travel above or below the roads. Subways already exist, so innovators are left looking to the sky. "We're not talking like a quantum leap in technology that's necessary," said Austin Moeller, director of equity research in the sustainability space at Canaccord Genuity. "It's more of an evolutionary technology than a revolutionary technology." eVTOL stocks to know Moeller is most excited about the potential for Joby and Archer . "They're sort of the first in line and they had the first-mover advantage," he said. He rates both stocks a buy. While he's in the majority with his Archer call, the average analyst has a hold rating on Joby, according to Refinitiv. ACHR JOBY YTD mountain Archer shares hit a 52-week high on Tuesday. Both stocks have more than doubled year to date. But Wall Street sees the stocks diverging from here. The average analyst expects the rally to continue for Archer, with an average upside of around 90% predicted over the next year, while Joby is expected to grow just under 3% over the same period, per Refinitiv. Joby is the far larger business, with a market cap of $5.5 billion, compared with Archer's $1.1 billion value. JOBY YTD mountain Joby shares hit a 52-week high in late June. Both have begun flight testing in the hope of presenting aircraft to the Federal Aviation Administration for approval. That is a key obstacle ahead for these companies, analysts said. The FAA this week released a plan to get advanced air mobility operations running in the near term, noting they should be "at scale" in at least one site by 2028. Moeller said approval is likely one to two years off for these companies as opposed to decades. But Cowen managing director Cai von Rumohr said investors should be prepared for timelines to be pushed back, as this is still considered "early-stage tech." "Given the push for climate and to basically reduce carbon emissions, I think, at some point, there's going to be a market," von Rumohr said. "But there are a number of challenges getting there." When the time does come, manufacturing partnerships with traditional automakers could help both companies ramp up production quickly, Moeller said. (Joby has paired with Toyota , while Archer partnered with Stellantis .) There also are already deals in the works or completed, like Joby's plans to deliver its aircraft to an Air Force base by early 2024 , as evidence of early demand. Elsewhere, Moeller's watching Lilium and EVe Mobility , which he also has buy ratings on. The two have seen relatively modest gains compared with other eVTOL stocks, up about 14% and 2% this year, respectively. Vertical Aerospace shares have been cut in half so far this year. After a series of delays pushed out its development timeline, the stock has trended downward and closed Friday at $1.76. Moeller rates it a hold, but the handful of analysts who cover it have price targets that imply gains of more than 9,000% on average. The startup took a critical step forward in recent days by completing an untethered remotely operated test flight. 'An entirely new market' To be sure, there will be growing pains even after the FAA gives the aircraft a green light. Von Rumohr said there could be some issues finding niches, as one company's domination of a certain region of the country or world could make it more difficult for others to enter those markets, thus hurting those businesses. As a plus, Moeller noted there is already some infrastructure in place with helicopter pads and underutilized airports, which can help bring the aircraft to consumers quickly. Beyond business use, eVTOL is seen as a competitor to Uber or Lyft if the price is competitive enough, especially in big cities where rideshare rates tend to be higher. Moeller noted the government's support as it aims to aid business that lower carbon emissions in the country can be helpful in keeping costs down. That can increase the total addressable market as a mode of transportation that isn't so expensive it can only be afforded by a small percentage of consumers. The outlook is still clouded by many variables, von Rumohr said. In this environment, it's wise to start with a basket of stocks rather than hedging bets on select names, he said, adding that the pecking order could still change drastically. Also, investors should be prepared for volatility. Marco Iachini, Vanda Research's senior vice president, said in a newsletter earlier this month that Joby was a candidate for a "melt-up" driven by retail investor interest. A rally at the beginning of the month could have, in fact, been a short-squeeze, leaving the stock susceptible to a retreat ahead. JPMorgan analyst Bill Peterson noted Joby's recent outperformance when he downgraded shares to underweight from neutral on Wednesday. While he said the company has a good management team and has executed in accordance with its timeline, the recent rally is "largely overblown" and more likely a result of investors covering shorts than the business actually improving. Moeller advised investors entering the sector to consider if the company is first in line or if its aircraft is easier to maintain or operate than competitors'. It's also important to know which have enough capital raised to get over the finish line. "It's definitely an important investment opportunity for investors," Moeller said. "There's essentially an entirely new market that is starting to form here." But both Moeller and von Rumohr agree it may not be a rising tide that lifts all boats — or, to keep on theme, an electric engine that equally powers all aircrafts. "Do I think that all of them will ultimately be successful?" Moeller said. "Not necessarily."