Lilium Stock Is Worth The Lottery Ticket (NASDAQ:LILM)

Lilium (NASDAQ:LILM) doesn’t have a finished conforming prototype of its eVTOL jet, doesn’t have FAA or EASA certification yet, and it doesn’t have a proven business model that has demonstrated value in the real world. Further, it is burning cash reserves fast and may need to dilute shares or take on debt to raise money before it is generating a profit. Heck, even the Seeking Alpha quant score rates Lilium a “strong sell”. Still, I see this company as well worth taking a flier on at its current market cap of around $724 million given: 1) the projected eVTOL total addressable market in the coming decades, 2) my belief about how much market share Lilium will be able to control in that space, 3) the quality of the product it is bringing to market, and 4) the company’s many competitive moats.

If you want an overview of the company, its website does a good job of explaining what Lilium is all about. I will be focusing this article on some of the most interesting and financially-relevant observations that I’ve made over the last week or so of studying this company.

In the next five sections, I’ll be discussing what I see as potential competitive moats.

Networking Effect From Ride Shares

On the subject of ride cost, Lilium’s Public Affairs and B2G Partnerships Manager at the time, Marie Masson, said in a meeting with the Tampa Bay Area Regional Transit Authority on July 17, 2020 (15:58):

. . . there are three main factors which are going to allow us to decrease this price point very significantly within just a few years. The first one being, of course, network effects as soon as we have more landing pads and more jets flying around in the region where we would start.

It is clear that Lilium wants to keep costs low, and understands that large-scale adoption of its service in and of itself can support this goal. Using a network to drive down costs creates a natural barrier between Lilium and competitors that might try to erode the market share that Lilium could secure in the future. In case you are wondering why I think Lilium will capture this advantage and competitors won’t, you need to understand my view on the company’s manufacturing capabilities.

Compared to Joby Aviation (JOBY), which I view as the most serious competition, Lilium seems much further ahead in its manufacturing plans. In an interview with Bloomberg in June 2022, Joby’s CEO said (1:38):

We’ve just completed our pilot production facility. This gives us the ability to produce tens of aircraft per year. We have a close partnership with Toyota and we are working with them on the plans for our phase one production facility, which will be able to produce hundreds of aircraft per year.

Compare that to what Lilium’s head of manufacturing said in a video posted more than a year ago, in March of 2021:

Three years before entering into service, we hired all the key leaders we need to have.” Later in the video he said, “We will commission our first manufacturing setup for assembly and testing four hundred aircraft per year.”

And then, “Already [in] 2025/2026 we plan to install a thousands-aircraft-a-year factory . . .”

Lilium seems to be way ahead in what is probably the most challenging part of the whole equation: manufacturing its aircraft at scale. Even if Joby gets certification before Lilium, I still think it is behind in production. I see Lilium taking the networking effects prize. At the moment, Joby is valued at more than four times Lilium’s current market cap.

Bringing An eVTOL To Market Is Capital-Intensive

Most of the companies trying to bring an eVTOL aircraft to market probably won’t be successful. I must admit that even Lilium, the company that I believe has by far the best product in the works, might not make it to market. Such a large capital need, especially if there are companies that are already operating in the eVTOL space, could significantly deter competitors from trying to bring a new aircraft to market. Here is Lilium founder, Daniel Wiegand, talking about some of the surprises he has encountered as he builds his company (6:00):

There’s good stuff, which we didn’t anticipate, like the regulation coming quickly, like the sector and the whole supply chain and industry coming together, willing to make it work. And there’s been other things that were difficult, like the realization that a project like this is a billion, and not maybe a hundred million.

According to SMG Consulting, Lilium has the second-best financing profile, behind only Joby’s reserves (double what Lilium has to work with). With almost a billion dollars, Lilium is relatively well-funded. As more and more eVTOL companies make it to market, I think it will deter others from trying.

Lilium Is Securing Patents To Secure Its Innovations

Lilium recently submitted 37 new patent applications, part of 50 that it has been pursuing since 2021 according to a Yahoo finance article. That article suggests that more patents are on the way. In late 2020, Lilium’s communications lead, Oliver Walker-Jones, said on The Pilot Talk Podcast:

If you look at the people who work in the business, we have some remarkable minds. Daniel, who founded the business, the CEO, he’s one of four co-founders and he’s legitimately a genius I think. And you know he has all sorts of ideas. He has a kind of like Tesla Elon Musk book somewhere tucked away, you know, and he works on ideas so, I’m sure there’s something else that he’s working on that he’ll come out with one day. I don’t want to steal his thunder.

In August, the current CEO, Daniel Wiegand, will step into a new role as Lilium’s Chief Engineer for Innovation and Future Programs and Board Director. Taken together, this suggests that Lilium understands how important it is to protect its IP and that it views this as an important piece of the value it is creating. Daniel Wiegand, in particular, seems especially well-suited to driving value for Lilium via engineering innovation that the company will protect with patents.

Exclusive Battery Agreement

Lilium announced that it would be working with battery startup, Zenlabs, to source batteries for its aircraft. Zenlabs is a company that Lilium holds a large stake in, and is providing batteries to Lilium under an exclusive agreement: Lilium is the only company that can use the batteries for commercial regional EVTOL applications. The batteries, as Lilium describes them, demonstrate cutting-edge performance.

Of The Most Serious Competition, Lilium Is Targeting The Highest Payload

At launch, Lilium is hoping to take up to 6 passengers plus a pilot. This is 50% more passenger capacity than the next most serious competitor, Joby Aviation. Lilium’s max cargo load in the jet it is planning to launch is a robust 7,000 lbs. For reference, Joby is targeting a 4,800 lb carrying capacity in the plane it is trying to bring to market. The larger payload capacity that Lilium is targeting is going to equate to better unit economics, which I think is going to win Lilium more business than its competitors. It isn’t easy to tweak aircraft design quickly. There is a long and expensive development and certification process. If Lilium has the most efficient design that comes to market, that is going to persist as a reality that Lilium’s competitors will have to face for a long time and offer Lilium a competitive advantage.

The eVTOL TAM Is Forecast To Be Enormous

A team of Morgan Stanley analysts is currently forecasting a total addressable market of $55 billion for the eVTOL industry by 2030. That number skyrockets to more than a trillion dollars a decade later, in 2040, and all the way to nine trillion in 2050. An algorithm developed by SMG Consulting that was designed to assess a company’s progress towards certifying and bringing an eVTOL to market at a mass production scale lists Lilium as the fourth (out of almost 700 companies ranked) most likely company to be successful in this regard. The tool is described as data-driven and unbiased. The same organization that publishes that list also ranks infrastructure readiness for eVTOL opportunities. Lilium’s infrastructure partner, Ferrovial (OTCPK:FRRVF) (OTCPK:FRRVY), is ranked first in the current list for its contributions to Lilium’s US launch plans in Florida. In other words: Lilium is a serious contender to capture a large share of the eVTOL TAM, which itself is projected to be enormous. Morgan Stanley says near the top of its report, “We don’t think investors are prepared for the scope of this revolution.” Including Lilium, there are currently only six companies in this space that have raised at least half a billion dollars. If Lilium captures even 10% of a $55 billion market by 2030, its current market cap near 700 million seems likely to jump much higher. In an analyst presentation delivered last year, Lilium projected longer-term margins to be 25% (pg. 46). If the number of LILM shares outstanding stays fixed at 266.77 million, that works out to an EPS figure north of $5.15 by 2030. Assuming a P/E of 10, conservative in my opinion given the potential growth profile, you arrive at a fair stock price of around $51 per share. The current stock is trading for around $2.5 per share. That works out to a CAGR of almost 46% for the next eight years. And that is to say nothing of the enormous upside present in the bull case scenario laid out for a much higher TAM by 2030, the potential for Lilium to capture a larger share of that market, and the explosive projections for TAM in the decades that follow 2030. In short, if Lilium makes it to market, there is good evidence that it is in line to experience high growth as a company.

Morgan Stanley’s Model Assumptions Vs. Lilium’s Projected Entry Stats

The Morgan Stanley report discussed above uses base case technology assumptions that Lilium expects to beat right out of the gate. The payload and range Morgan Stanley uses to model its base case report are 750 lbs moving 150 miles. The 7-seater jet that Lilium is planning to launch has an expected range of 155 miles and a 7,000 lb max payload. For reference, the bull case tech specs list 2,200 lbs for the payload. Put another way, Lilium expects to deliver more than three times the payload that Morgan Stanley outlines as the bull case. This gives you a sense of Lilium’s advantage in payload compared to its competition.

Risks

Lilium’s cash-hungry approach is simultaneously encouraging and nerve-racking. I like that it is hustling to realize its vision. Still, its cash burn could put it in a position of needing to dilute shareholders to raise additional funding. A short-seller report from Iceberg Research suggests, among other things, that Lilium only has an 18-month timeframe at its current cash burn rate. The company also recently announced a delay in the certification timeline. Further delays could weigh on investor sentiment and bring some gravity to the LILM stock price. Other companies bringing their aircraft to market before Lilium could give those companies the chance to get people comfortable with their specific offering. The company would also benefit from more time to learn how to improve its service in a real-world application. And although Lilium’s YouTube channel has become more active recently, there aren’t many clips demonstrating the technology at the edges of what Lilium claims its jets will achieve. Although I think it’s smart for Lilium to test slowly and carefully, and avoid crashes that are costly and harmful to public perception, I also understand why some investors would be skeptical that enough technology exists in an advanced state to justify the current $724 million dollar market cap. It’s also possible that the projections that Morgan Stanley is making about the total addressable market for eVTOLs are far too aggressive. And then there is the issue of public adoption. Lilium needs to convince people to try a new way of flying. I see Lilium doing a better job of this than its competition due to the less intimidating visual impact of its jet design compared to open propeller aircraft, but many people are afraid of flying and afraid of change, so this isn’t a trivial undertaking for any eVTOL company. If the company were to crash one of its jets in testing, that could hurt public adoption, delay the certification timeline, and incur a faster cash burn. And again, as mentioned earlier, LILM has earned a “strong sell” Seeking Alpha quant rating at the moment. Lilium is facing very real risks.

Conclusion

With so many potential competitive moats, an enormous potential market, relatively good prospects to bring its jet to market, superior efficiency specifications, and a low market cap compared to its main competition, Lilium seems worth rolling the dice on. This is a high-risk-high-reward play, but I suspect the reward more than justifies the risk that the company goes bankrupt. Short seller interest is about half of what Joby Aviation is showing at the moment, and there is a lot of possible positive news flow ahead. If you are a patient investor and can stomach some risk that Lilium goes bankrupt, you might consider carving out a small position in your portfolio for this enticing boom or bust play.