On paper, buying the blood on the streets for electric vertical takeoff and landing (eVTOL) specialist Archer Aviation (ACHR) might seem like a no-brainer. According to Grand View Research, the global eVTOL market size reached a valuation of $1.35 billion in 2023. By 2030, the sector could be worth $28.61 billion, representing a compound annual growth rate of 54.9%.
With Archer ranking among the top players in the field, ACHR stock could be viewed as a compelling discount. In the business week ending Jan. 10, shares lost 22.67% of equity value, defined as the difference between Monday's open and Friday’s close. That’s a gargantuan loss. Since ACHR’s public market debut, its worst weekly loss was 29.68%, posted in June 2022.
Still, because of the long-term potential of the eVTOL industry, Wall Street’s opinion cycle generally spoke positively about Archer in light of the valuation haircut. Because Archer is only projected to generate $37.44 million in revenue for fiscal 2025, the forward sales multiple of ACHR stock is sky high. However, the red ink is undeniably tempting for someone looking for a deep-value opportunity.
Nevertheless, investors have good reason to wait until the volatility fully dies down. Like it or not, ACHR stock carries a negative bias and that’s always going to put bullish speculators on the backfoot.
Since early 2021, there have been 209 four-week trading periods. Of this tally, 94 such sessions (or 45.19%) resulted in a non-zero positive return, 114 saw a loss and one four-week period saw a net gain of 0%. In other words, an investor betting on ACHR stock at the start of any given week will probably lose money more often than not four weeks later.
Obviously, these odds — calculated stochastically — aren’t great. However, the normal fear-greed continuum sometimes shifts dramatically under aberrant circumstances. For example, ACHR stock losing almost 23% of value last week is assumed to inspire a buy-the-dip mentality among investors; that’s why the opinion cycle is so bullish on this opportunity.
But do the facts support this optimism? Since making its public market debut, ACHR stock has witnessed 31 occasions when it lost 10% or more during a one-week period. Out of this tally, there have only been 10 times (or 32.26%) where ACHR posted a non-zero positive return by the end of the fourth subsequent week.
To put it simply, if you buy extreme dips in ACHR stock, there may be a 67.7% chance that roughly a month later, you’ll have lost money. What’s more, the median loss during these negative outcomes lands at 15.42%.
In the spirit of transparency, this statistical framework doesn’t mean that traders should wantonly short ACHR stock. During the rare occasions that shares pop higher four weeks following an extreme-fear event, the median return is robust — we’re talking 26.5%.
Therefore, it’s tempting to take the bullish trade. It’s just that much more often than not, ACHR stock tends to be a bull trap.
Given the strong likelihood of downward movement, the most advanced and aggressive traders may deploy a debit spread, specifically a bear put spread. This transaction involves buying a put option and simultaneously selling a put at a lower strike price (of the same expiration date), with the idea of using the credit from the short put to offset the debit paid of the long put.
For a simpler approach, adventurous traders can buy the $8.50 put expiring Feb. 7. As stated earlier, there’s a decent chance that ACHR stock could lose around 15% by expiration. Based on last Friday’s closing price of $8.97, the equity could fall to $7.59 under a dynamic statistical model (that is, accounting for behavioral changes due to an extreme event).
At time of writing, the premium (on the ask) is 78 cents for the $8.50 put, meaning that ACHR stock must fall to $7.72 to break even on purely intrinsic value. That’s within the range of the volatility that can be expected.
For the most conservative investor waiting for a viable entry point, the best idea may be to wait. Yes, it’s tempting to buy the discount now, especially with financial publications talking positively about the contrarian view. However, the empirical data doesn’t quite support the optimism.
In fact, the odds of success of a long position appears to diminish each week following an extreme-fear event. With such an unfavorable backdrop, investors will be better served waiting out the red ink.