Looking at the stock charts of Joby Aviation (NYSE: JOBY) and Archer Aviation (NYSE: ACHR), you might think electric vertical takeoff and landing (eVTOL) vehicles are the next big thing.
Both stocks have soared in recent months, benefiting from a meme-stock frenzy and some positive steps on the regulatory and partnership fronts.
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The surging stock prices have attracted investor attention, and both Joby and Archer are hoping later this year to begin commercialization of their airborne vehicles, which are similar to helicopters but quieter and emission-free.
They have also signed contracts with airlines, automakers, and others that seem to indicate that the technology is going mainstream. These companies' primary business model is operating an aerial ride-sharing service, ferrying passengers for short-haul flights to airports or other destinations in a metro area.
However, before investors envision futuristic electric drones blanketing city skylines, there's a pressing practical problem that needs to be solved.
A glitch in the matrix
EVTOL operators like Joby and Archer believe their primary advantage over traditional ride-sharing options like Uber and Lyft is speed. For example, these air taxis can replace car trips in traffic that might take 60-90 minutes with a 10-20 minute flight.
That sounds like a clear improvement, but there's a logistical challenge to taking eVTOLs that investors seem to be ignoring. These vehicles need places in high-density city centers to take off and land, known as vertiports, and those vertiports won't be easy to obtain. The time for passengers to get to and from the vertiports also needs to be factored into any comparison. The need for vertiports puts eVTOLs at a competitive disadvantage to ground-based ride-sharing options like Uber and Lyft, which can pick up riders anywhere there's a road, and usually arrive within minutes.
Even factoring in the speed advantage of an eVTOL, it's going to be difficult to match the convenience of a conventional ride-sharing service without a massive network of vertiports. For an air taxi ride to make sense to a customer, the vertiports would have to be within walking distance of would-be passengers. Otherwise, the passengers would have to take a taxi to get to the air taxi.
The long-term plans for vertiports are unclear, but Archer said last year it was planning to open five vertiports in the San Francisco Bay Area. For a large metro area, that's only going to meet a small fraction of use cases. Here, the network effect acts as a disadvantage as a passenger could only go to one of the other four vertiports, or the airport, presumedly. There's also the issue of timing, as eVTOLs won't be able to compete with the on-demand nature of ground-based ride-sharing.
It's a classic scaling problem, and building out a full network of vertiports is highly risky without first proving the concept and demand for it.
Additionally, Archer Midnight eVTOLs have a catalog price of $5 million, making them more than 100 times more expensive than the typical car used for ride-sharing. That makes the economics much more difficult, and the logistical challenge of matching vehicles with passengers more pressing. It also means that eVTOL rides are unlikely to be price-competitive with an Uber or Lyft.
In its 10-K filing, Archer Aviation says that Morgan Stanley forecast that the total addressable market for the urban air mobility market is projected to reach $1 trillion globally and $9 trillion by 2050. Such a forecast is far-fetched for a technology that hasn't even been commercialized, and those forecasts do a disservice to investors, leading them to believe that something so uncertain and unproven can be reasonably predicted.
That forecast and similar projections help explain why these companies are now valued in the $5 billion-$7 billion range, even with virtually no revenue and an unproven technology.
Image source: Archer Aviation.
Disrupting transportation is harder than it looks
More than 10 years ago, Amazon Founder Jeff Bezos went on 60 Minutes and predicted that Prime Air, the drone delivery service it demonstrated, would be operational within five years. Since then, regulatory hurdles, operational challenges, and a lack of significant interest among customers seem to have killed the concept.
An operational flying car was invented as early as 1937, but safety and logistical issues have made the concept impractical. More recently, Zipcar and other car-sharing platforms have failed to disrupt conventional auto transportation and car ownership, and autonomous vehicles have faced more obstacles than insiders expected a few years ago.
Framing eVTOLs as competing with ride-sharing vehicles seems to be a misunderstanding of the value proposition that each provides. Instead, it seems like the market the eVTOLs are targeting is short-haul helicopter taxi services like Blade, which is a much smaller market. EVTOLs may be less expensive than Blade, and they are quieter and cleaner than a helicopter -- but they seem to be an improved version of that existing service, rather than a competitor to Uber.
Joby and Archer may find some success selling their vehicles directly to buyers like airlines, but the notion of creating a large-scale urban air taxi network faces considerably more hurdles than investors are acknowledging.
Archer currently has no revenue and Joby has earned $1.1 million over the last four quarters, meaning both companies are still in the development stage, despite broadcasting their intentions to commercialize their businesses this year.
With market caps of $5 billion and $7 billion, respectively, high expectations are already baked into these stocks. In aviation, what goes up must come down, and that's likely to be true for these eVTOL stocks as well.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Uber Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
