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I’ve been obsessively studying Lilium (NASDAQ:LILM) for the last few weeks. In this article, I’ll be outlining several observations about the upside potential for Lilium that I think are under-discussed or not immediately obvious. These observations, in combination with what I believe to be strong potential that is more obvious, make me think that Lilium is undervalued at its current market cap, especially when compared to those of Lilium’s peers.
Ferrovial Affect
Ferrovial committed $200 million to build out a vertiport network in Florida in partnership with Lilium. Lilium will repay Ferrovial through landing fees. For Lilium to have that amount of money committed to an important piece of their strategy, the infrastructure needed to start a short-haul and regional flight service in the US, means Lilium doesn’t need to commit capital raised on the open market (in the past or the future) for that particular initiative, and they don’t have to wait until they are profitable to start the B2C arm of their business. In other words: I believe the capital that Lilium has raised is undercounting an important pocket of infrastructure funding. The fact that Ferrovial is taking on the construction of the project is icing on the cake and brings the timeline of a Florida vertiport network launch forward in time. The AAM Infrastructure Index, a website that “…assesses AAM infrastructure companies readiness towards the deployment of multiple vertiport networks all over the world in commercial operation, based on a proprietary tailor-made-for-the-infrastructure-market algorithm that uses publicly available information as well as expert knowledge” currently only lists five companies in the Advanced Air Mobility race. Ferrovial takes the first spot. Notice, too, how much less funding the other companies on this list have committed to their infrastructure projects. The second-ranked company on this list doesn’t have a public funding number shown but appears to be planning just three vertiports across Italy and France in 2024. For reference, Ferrovial is partnering to develop more than ten vertiports in Florida in partnership with Lilium.
The Advantage Of Simplicity
Lilium’s jet is simple. That simplicity offers many advantages, but I am especially interested in the implications for manufacturing. I believe a simple design offers Lilium valuable manufacturing speed. My sense is that investors are over-valuing the impact of getting to market first and undervaluing the impact of getting the most aircraft into the skies. Joby Aviation (JOBY) is trying to bring an aircraft to market that appears to me to have a more complicated aircraft design than the Lilium jet, and yet their market cap is about four times higher than Lilium’s. Lilium recently announced that they have reduced the number of engines and batteries in their seven-seater jet. From their Q1 shareholder letter:
“With a 10% increase in engine diameter, we were able to reduce the number of engines from 36 to 30, with nine now on each of the main wings, six on each of the forward canard wings. As noted in our last shareholder letter, this modification will simplify the design and reduce weight and cost, while providing even greater flight stability…”
Lilium managed to simplify further an already simple jet design. At a time when inflation is a worldwide problem and supply chains are suffering serious bottlenecks, having a simple design to manufacture could prove to be a crucial advantage that Lilium has over its competition.
Diversity Of Potential Income Streams
Lilium has forged memorandums of understanding with several companies who expressed interest in collectively buying hundreds of Lilium’s jets and, in some cases, helping Lilium to establish flight networks in different countries. A large (and growing) number of interested parties are located around the world. Their interest, in my opinion, represents a vote of confidence for the company and reduces the risk of depending on a smaller number of near-term customers. Lilium is also pursuing a business model that could generate a diverse set of revenue streams by 1) selling jets directly to airlines or small private operators, 2) starting their own flight service, and 3) providing software and parts support following jet sales to other companies. Lilium is pursuing dual certification with EASA and the FAA, which offers the potential advantage of unlocking at launch a large area of the world in which to conduct business. This global diversity offers yet another layer of risk reduction that other eVTOL companies can’t quite claim yet: Lilium isn’t beholden to just one market and whatever economic conditions are attached to that market. Lilium’s cabin is designed to be flexible, offering a premium cabin configuration, a regional shuttle configuration, and a cargo configuration. Each jet will have the ability to serve a diverse market. Consider the advantage this would have offered a company when the pandemic forced people to stay home. People avoided flying and turned to online shopping, which meant there was suddenly more demand for cargo flights and less demand for passenger flights (source, pg 12).
Autonomous Flight Transition
In response to a question about autonomy during a meeting with the TBARTA board of directors, Lilium’s Tassilo Wanner explained that the Lilium jet would be piloted at first but that the jets could eventually be controlled from the ground where one pilot would oversee several concurrent flights. As soon as Lilium is able to take the pilot out of the cockpit, they will simultaneously bring pilot costs down and expand revenue and margin potential. Lilium projects a pilot in one jet will cost 30 cents per air mile. Adding some level of autonomy to the aircraft and putting even just two flights under the purview of one pilot brings the pilot cost down substantially. At the same time, taking a pilot out of a jet opens up an extra seat. This increases the average passengers-per-trip figure, which can drive down costs for consumers or pad margin for Lilium. It’s worth noting that the pilot is projected to represent one of the largest costs to operate a Lilium jet at launch. If Lilium can bring the number of flights under the control of one pilot up to five, they will have reduced the pilot cost per mile for each flight all the way down to just 6 cents. The 24 cents per mile in savings can also go to padding margins or cutting the cost of the service for customers. This is just the intermediate stage between launching with a piloted jet and moving to a fully autonomous aircraft, which would offer further cost savings. And this is to say nothing of the value of not needing to find as many pilots to ensure Lilium’s service can continue to deliver passengers to where they want and need to go.
Intelligent Charging
Energy costs are projected to account for about 6% of a Lilium jet’s operational costs. Because Lilium will be recharging their jets’ batteries regularly there is potential for optimization. According to PSEG Long Island, “…energy production costs can range as much as 70% at different times of the day (peak, off-peak and super off-peak hours)…” With the significant capacity of their batteries, Lilium’s jets are each effectively large energy storage devices. Optimizing when the jets’ batteries are charged is, I imagine, a relatively simple opportunity to lower costs. If we imagine, as an exercise, that Lilium could cut 70% off of their operating energy costs, I suspect they would reduce their cost-per-air-mile projection by around four cents. That might not sound like a lot, but Lilium’s number-crunching suggests a four-cent reduction in operating cost-per-air-mile would translate to more than a full percentage point improvement on margin.
Dual Certification Is Less Risky
Given that Lilium has ambitions to operate around the world, it strikes me as especially smart to pursue dual certification with EASA and the FAA. Even though it is a bit harder up front for Lilium to navigate the certification process with two different agencies, they gain from double counting much of their testing, and they avoid the risk that standards will change between certification campaigns. While Lilium’s competitors might beat Lilium to one market, Lilium is positioned to be the first eVTOL to notch certification with the two largest aviation certification regulators. Despite a significant head start in development Joby won’t likely be the first to achieve this feat, and yet investors still value Joby at four times that of Lilium. Archer Aviation’s (ACHR) market cap is north of a billion dollars, despite a certification approach that, like Joby, is limited to the FAA. Even a company like Eve Holding (EVEX), targeting 2026 for their aircraft to be certified through ANAC, is valued at a billion dollars more than Lilium. Their company is backed by Embraer and has secured a large number of non-firm orders, but their aircraft concept has an unknown range and cruise speed and is projected to only carry four passengers at launch. That assumes the concept is even viable to be certified and mass-produced.
Low Infrastructure Cost And Environmental Implications
The fast turn-around time and exceptionally low cost to build a vertiport network, compared to roads and railroads, make Lilium’s transportation pitches to regulatory authorities easy to greenlight. This effect is amplified when considering the considerable CO2 emissions reductions Lilium jets offer. During a presentation to the TBARTA board of directors, members from Lilium’s team laid out the advantages that a Lilium jet and vertiport network could offer Florida. I was encouraged by how receptive the entire panel was to Lilium’s proposal. TBARTA Vice-Chair, Kathryn Starkey, said during the question and answer section of the presentation, “I would say that we don’t want to take a long time with this if we want to be one of the leaders and innovators in the country on this exciting mode of transport. I do think we need to act quickly.” In other words, there is early evidence that some of the friction that accompanies regulation might be mitigated by the compelling and varied value propositions that Lilium offers.
Serious Battery Improvement Upside
According to Lilium’s Architecture Paper, “The main disadvantage of ducted fans is that because of the higher disc loading, as discussed above, the hover power is higher than for propeller aircraft.” That disadvantage is minimized as battery tech improves and flights start covering larger distances since the hover phase will account for a smaller percentage of the total trip. Lilium could also choose to reduce battery weight to make the same short-haul flights they offer at launch more economical. Better battery energy density, projected to be materially higher over the coming years, could allow the same seven-seater Lilium jet (with upgraded batteries) to fly greater distances. The time savings for longer trips make the value proposition more compelling since transition time at either end of the journey would become a smaller percentage of the total trip. Longer trips would also open up more revenue opportunities for Lilium. Based on data from 2006, around 85% of all flights are short-haul flights under three hours long. Even while lagging behind pre-pandemic revenue numbers, the worldwide commercial airline industry is conservatively generating about $650 billion in revenue. If a higher battery energy density in the coming years allows Lilium to compete for 85% of the world’s flights, their current market cap of around $800 million would seem more obviously like a compelling valuation to me. I want to take a minute to emphasize here that Lilium’s superior unit economics, a function of delivering a larger payload than their eVTOL peers over further distances, positions them to take advantage of this large short-haul potential market in a way that companies like EHang (EH) or Volocopter can’t enjoy without significantly redesigning their initial aircraft. If you think battery tech improvements are too far out into the future to be contemplating at this stage, consider that BloombergNEF’s Head of Advanced Transport said, “Battery energy densities keep getting better. They’ve almost tripled at the cell level since 2010.” Lilium is launching with a jet that will fly for about an hour. I believe that batteries that are twice as energy dense as the batteries Lilium will use at launch offer more than double the range increase potential to Lilium. Remember, the impact of energy-expensive take-offs and landings is averaged lower the further Lilium jets fly in a single mission. Consider, too, that Lilium can keep its stated battery reserves fixed and put more of the upgraded energy density in future batteries directly into the jet’s range. One way to think about this dynamic: Lilium offers compelling exposure to future battery tech improvements.
Small Footprint Advantage
Lilium has made it clear that one of the advantages of the electric jet technology they are developing is that they can scale up their jet design without needing a significantly larger take-off and landing area. This is a function of their ducted fan approach and is in sharp contrast to open propeller aircraft. I believe it’s important to emphasize here that infrastructure isn’t easy to change. Lilium won’t have to rethink its infrastructure approach or rebuild existing vertiports if they want to scale up its jet design in the future. All of the other companies who are vying for the business to consumer model for their eVTOLs will need to consider this. Open propeller designs won’t have as easy a time scaling up compared to Lilium and could be limited to taking smaller payloads even as battery tech improves.
Don’t Forget About The Flight Models
Some people have suggested that Lilium might not have the tech they say they do because they haven’t demonstrated it in the real world. I think this overlooks Lilium’s proprietary flight models, which the team has guided to be exceptionally good at predicting real-world flight behavior. Watching how smoothly Lilium’s technology demonstrator achieves main wing attachment supports the company’s claims about the accuracy of their simulators in my opinion. I can’t imagine that Lilium would be pursuing dual certification and manage to retain such a high-caliber team without a viable product. I think it’s reasonable to assume that Lilium’s highly accurate flight-testing simulators have modeled transition for the whole aircraft already, including the canard and the body, and that they have modeled all sorts of flight conditions for the seven-seater they plan to bring to market that the world has not yet seen footage of in flight.
Risks
Lilium is not a play for the faint of heart. Lilium shares could lose value rapidly if the company sustains a jet crash, fails to achieve certification, or runs out of cash before turning a profit. With the economy, inflation, and supply chains on edge, Lilium will have substantial hurdles to contend with as they push toward certification. Even if its jet achieves certification, the company still has to prove its business model. Lilium is not generating revenue yet, so we can only speculate what its business will look like in the future.
Conclusion
It’s hard to value an unproven start-up that is burning cash fast and is at the mercy of the certification process, but I keep coming back to the potential opportunity in the emerging “advanced air mobility” sector that, according to the base case of a team from Morgan Stanley, is projected to account for around five or six percent of the world’s GDP by 2050 (source, pg 32). The risks that Lilium is facing in the near term, namely certification uncertainty, public and regulatory acceptance, and competition, all seem from my perspective to be somewhat overblown. Lilium is moving carefully and strategically through the certification process with a seasoned team, regulatory bodies and the general public (pg 61) have shown early signs of embracing eVTOL technology, and Lilium’s jet design differentiates the company from other eVTOL companies that I think investors are unwisely clumping together with Lilium. Lilium’s market-entry aircraft projects to fly a greater payload further than its competition. I don’t think investors are accurately accounting for the advantage that opens up to Lilium. Their jets stand to expose Lilium to a larger share of the enormous TAM that Morgan Stanley is projecting over the coming decades. Lilium could prove to be in a class of its own in the advanced air mobility sector and I believe that, compared to other companies vying for a seat at the AAM table, Lilium’s valuation doesn’t yet reflect the larger market share its technology exposes them to.
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