Palantir and Archer Aviation: A Look at Their Partnership and Prospects

Artificial intelligence (AI) is making significant inroads across various sectors, with the aviation industry being a notable area of focus. Recently, Palantir Technologies (NASDAQ: PLTR) and Archer Aviation (NYSE: ACHR) announced a collaboration aimed at advancing aircraft and air taxi technologies. This partnership comes during a surge in both companies’ stock prices, with Archer Aviation gaining over 200% and Palantir rising nearly 500% in the last year.

Investors are keenly interested in both firms, but which one offers better long-term value? Let’s examine the details.

AI Integration in Aviation

Palantir and Archer Aviation are poised to disrupt traditional aviation players. Palantir is well-known for its AI analytics capabilities, particularly for government and major business clients. Meanwhile, Archer Aviation is developing one of the first electric air taxis, which could revolutionize transportation pending FAA approval.

The collaboration will leverage Palantir’s Foundry and Artificial Intelligence Platform (AIP) to enhance software for future air traffic control and route planning. This integration is crucial as aviation leaders prepare for increased air taxi usage alongside conventional aircraft. While no formal timeline exists for product releases, this partnership strategically positions Archer to expand its air taxi network, and it adds to Palantir’s customer base for its AI software.

Image source: Getty Images.

Evaluating Revenue Models

When analyzing the two companies, it’s essential to consider their differing financial situations. Archer Aviation is currently pre-revenue and focused on developing its Midnight air taxi, awaiting FAA certification for launch. Although it has agreements with firms like United Airlines and the city of Abu Dhabi, it has yet to make any sales. This scenario might also apply to new aviation software being developed with Palantir. Despite lacking revenue, Archer Aviation boasts a market cap of $6.6 billion.

In contrast, Palantir generates substantial revenue, reporting $3.11 billion in the past year and a net income of $571 million. The company is securing numerous large contracts, closing 139 deals worth over $1 million and 31 over $10 million last quarter. These contracts reflect the growing demand for Palantir’s AI solutions.

A significant concern for Palantir is its valuation. With a market cap exceeding $300 billion, Palantir’s price-to-sales (P/S) ratio stands over 100, one of the highest in the market. Even top-tier software companies typically have P/S ratios closer to 10 or 20. This elevated ratio places Palantir in a precarious position in terms of valuation standards.

PLTR PS Ratio data by YCharts

Assessing Investment Opportunities

The narratives surrounding Archer Aviation and Palantir Technologies present compelling stories. Archer aims to revolutionize aviation with air taxis, while Palantir provides crucial AI insights to various organizations including the U.S. government. Their collaboration to modernize air traffic control and route planning could be transformative.

However, which stock stands as a sound investment? Currently, it may be prudent to avoid both stocks. While this may seem like evasion, it closely aligns with the market realities of these companies. Palantir’s P/S ratio raises significant concerns about future earnings and stock price growth. Given its high valuation, it would likely take years for Palantir to align its profitability with its current market cap, similar to what happened with Shopify during 2020 and 2021.

Even if Palantir’s revenue were to increase tenfold to $30 billion, and net income twentyfold to $10 billion, it would still be subject to a price-to-earnings (P/E) ratio of 30, which limits room for stock appreciation in the near term.

On the other hand, Archer Aviation currently has no revenue. Although it is anticipated to start generating income once the Midnight aircraft achieves certification, the stock still reflects an inflated valuation. At an average price of $5 million per unit, even if Archer sells 100 units annually, it would only reach $500 million in revenue, potentially translating to a modest $100 million in net earnings in a low-margin manufacturing sector. This scenario presents a premium P/E ratio against its current $6.6 billion market cap.

In conclusion, it’s advisable to steer clear of both Palantir and Archer Aviation. Both companies are positioned in exciting sectors, but they do not fit well into a prudent stock portfolio at this time.

Considerations for Investing in Archer Aviation

Before investing in Archer Aviation, consider the following:

The analyst team has identified their selection of the 10 best stocks that they believe are prime for investment currently—and Archer Aviation is not included in that list. The selected stocks hold potential for substantial returns in the foreseeable future.

It’s important to recognize that historical recommendations by this team have yielded impressive returns. For example, a $1,000 investment in Netflix recommended in 2004 would be worth approximately $642,582 today.

Meanwhile, a $1,000 investment in Nvidia from 2005 would have grown to about $829,879.

Brett Schafer has no positions in any of the stocks mentioned. The company has positions in and recommends Palantir Technologies and Shopify. The Motley Fool maintains a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.