Down 20%! This ex-penny stock just got stung by a short report

Archer Aviation (NYSE: ACHR) is a former penny stock that has been on my mind recently. I sold shares of this flying taxi start-up about a year ago, just before they went on to surge by more than 200%. Cue Homer Simpson’s famous catchphrase…

Rubbing salt in the wounds was rival Joby Aviation (NYSE: JOBY), the stock I doubled down on with the cash from that Archer sale. Until recently, it was ‘only’ up about 40% over this period.

So I was beginning to think I might have backed the wrong horse, especially after Archer signed a deal with Palantir earlier this year to “build artificial intelligence (AI) for the future of next-gen aviation technologies“.

However, two pieces of news have recently sent the Archer and Joby share prices on divergent flight paths. Here’s what has happened.

The Archer news

Archer Aviation is aiming to launch an air taxi service in Abu Dhabi by the end of 2025 with its Midnight electric vertical take-off and landing (eVTOL) aircraft. In Q1, it said everything had gone splendidly, and it had more than $1bn on the balance sheet.

Founder and CEO Adam Goldstein commented: “Archer’s pushing the boundaries of what’s possible and reshaping the future of aviation for years to come.” The stock jumped 23% after this bullish update.

However, it plummeted 20% a couple of weeks ago when short-seller Culper Research released a report accusing Archer of misleading investors. It said the firm’s Midnight eVTOL isn’t as far along as management has claimed, while also highlighting design changes that might suggest aircraft stability problems.

In response, Archer called the claims “baseless“, and said Culper is “not a credible research institution“.

The Joby news

By contrast, Joby stock surged 27% this week following the closure of a $250m investment from partner Toyota. This funding supports the firm’s progress toward FAA certification and commercial production of its electric air taxis.

Founder and CEO JoeBen Bevirt commented: “We’re already seeing the benefit of working with Toyota in streamlining manufacturing processes and optimising design.”

Joby remains on track to launch its service in Dubai later this year, but there could always be regulatory setbacks. Meanwhile, flying passengers safely from Manchester Airport to Leeds in just 15 minutes — instead of one hour+ by car or train — is still unproven.

My foolish takeaway

In my experience, reports from short-sellers need to be taken seriously, even though they have a financial incentive to see the stock in question fall. It definitely adds risk to the investment case because Archer hasn’t addressed any of the specific accusations yet.

That said, you can normally gauge how seriously other investors take the claims by the severity of the share price reaction. In Archer’s case, it’s 20% lower than before the report, but still up 27% in the past month and 230% over a year. Heavyweight partners like United Airlines and Stellantis add weight to its technology.

For investors looking to invest in this exciting space, I think Joby is worth a look at $8. But both these stocks are high risk because eVTOLS haven’t been approved by the FAA yet, meaning each firm is pre-revenue and therefore loss-making.

Still, at least recent developments have eased my concern that I backed the wrong horse.

The post Down 20%! This ex-penny stock just got stung by a short report appeared first on The Motley Fool UK.

More reading

• Up 49%! But have I backed the wrong horse in my Stocks and Shares ISA? 

Ben McPoland has positions in Joby Aviation. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.