Tesla Stock vs. Archer Aviation Stock: Wall Street Says One is Overvalued and Buy the Other Because It Can 3X
Wall Street analysts are advising investors to sell Tesla stock, which is seen as overvalued with an implied downside of 18%, and to buy Archer Aviation stock, which has a potential upside of 211%. Tesla has experienced significant growth but faces concerns over its valuation and market share. In contrast, Archer Aviation is progressing in the electric aircraft sector, having achieved key regulatory milestones and completed test flights, positioning it for potential rapid growth in the future.
Both the electric carmaker Tesla (TSLA 14.75%) and the electric aircraft maker Archer Aviation (ACHR -1.23%) are poised to benefit as the world adopts electric vehicles as a sustainable alternative to the fuel-guzzling cars and planes that have contributed to environmental issues.
Both stocks are in very different phases in their lifecycles. Tesla is known as the pioneer of electric vehicles and has seen its stock surge more than 1,100% over the last five years. It currently has a market cap of more than $792 billion. Meanwhile, Archer Aviation only went public in 2021 and has a much lower market cap than Tesla at $1.12 billion. Wall Street is telling investors to sell one and buy the other, which could be a triple-bagger.
Sell Tesla: Implied downside of 18%
There is a bull-bear argument for Tesla, with the bulls confident in the future of electric vehicles and Tesla's ability to maintain and grow market share. The bears argue that the stock is overvalued at more than 100 times forward earnings.
Wall Street seems split as well. Over the last three months, 35 Wall Street analysts have issued reports/ratings for Tesla, according to TipRanks. Eleven analysts say buy the stock, 16 say hold, and eight say sell. The consensus price target among these brokers is about $208, suggesting nearly 18% downside from current price levels.
Tesla has a lot going for it. It still owns the bulk of the electric vehicle market in the U.S., and the company's CEO Elon Musk claims it's the only profitable EV company. The company recently reported third-quarter earnings and the stock jumped 22%, enjoying its best day of trading in more than a decade. The stock kicked into high gear after Musk estimated that vehicle growth could jump 20% to 30% in 2025, ahead of what analysts had been modeling.
The bears, however, might argue the stock does not deserve such a rich valuation given that Tesla has lost market share in recent years and that the share of total EVs as a percentage of U.S. car sales has been stable to down in recent quarters.
Personally, I'm on the sidelines. It's not my style to buy stocks at this kind of valuation, especially when so much depends on assumptions about the overall market growth. Still, I do think EV sales will gain in popularity and become more of a necessity as the country tries to address the climate challenges ahead. So long term I could see Tesla trading higher than it is today. However, I would prefer to buy at a better valuation.
Archer Aviation: Strong buy with 3X potential
Archer Aviation is doing some pretty cool stuff, designing electric aircraft that can be used in daily travel. Its Midnight air taxis can transport up to four passengers and a pilot on consecutive 20-mile trips. The Midnight achieved a key regulatory milestone earlier this year and could take flight in New York City and Chicago as soon as next year.
Not as many analysts cover Archer as Tesla, but of the five cited by TipRanks, four rate the stock a buy and one a hold with a consensus price target of $9.70. This implies the stock price could triple with an upside of roughly 211%.
One big thing Archer has going for it is its progress with the Federal Aviation Administration (FAA). The FAA granted the company's Midnight Model M001 final airworthiness criteria in May, making it only the second air taxi in the U.S. to achieve that designation. This allowed Archer to move ahead with flight tests. In September, the company announced it had completed its 400 test flights well ahead of schedule. Then the FAA issued its final rule for advanced mobility aircraft, which analysts viewed positively for air taxi companies.
Being this far ahead of potential competitors on the regulatory front could give Archer a significant head start and even constitute a moat. Archer could essentially be where Tesla was when it started selling electric vehicles and could sap up market share quickly. Of course, navigating the skies is a little more complex than the roads and brings added uncertainty because it hasn't been done before. There might be setbacks along the way and the company also hasn't reached profitability, so you are effectively investing in a later-stage start-up. That said, I think Archer has a good risk-reward proposition and investors with some risk tolerance can certainly buy the stock.