LILM - Lilium: Interesting Speculative Play

2023-12-07 16:35:03 ET

Summary

• Lilium N.V. is a German aerospace company developing VTOL vehicles that could revolutionize transportation.
• The company aims to have multiple lines of business, including operating an airline, selling vehicles to other airlines, and providing vehicles for logistics and emergency response.
• Safety concerns, regulatory approvals, and the need for additional funding are challenges the company must overcome to succeed.

Lilium N.V. ( LILM ) is a German aerospace company that focuses on developing “VTOL” (vertical take-off and landing) vehicles. These are basically very large drones that can take humans and merchandise from one spot to another and if successful, it could revolutionize the transportation industry.

The company has designed its own vehicles which are powered by lithium batteries with a target high speed of 155 mph (250 km/h) while carrying 6 passengers and taking them to a distance of 110 miles. In the long run, the company targets faster speeds and more distance as lithium technology becomes more efficient over time.

The company hopes to have multiple lines of business in the long run. The first line of business would be an airline company operated by the company itself (and its strategic partners) so they would be moving people and goods from place to place for a fee. The second line of business would be selling its vehicles to other regional airline companies, many of which would actually compete with Lilium. A third line of possible business would include selling vehicles to companies like Amazon ( AMZN ) which deliver millions of products to people every single day, so these planes would be used for regional logistics purposes. Fourth, these vehicles could also be used by government agencies in emergency response, such as evacuating people quickly and efficiently from a disaster area such as wildfires or flooding.

There is also another line of business the company could be operating in, as long as it can get itself vertically integrated. This refers to parts and services business. The company could operate a number of service centers where it sells replacement parts, batteries or offer maintenance and repair services for additional income.

The company will also have to build partnerships in order to create an infrastructure and network of charging stations, as well as places where planes can land and take off from. Since these vehicles can take off and land vertically, they don't need a long runway or big dedicated spaces like traditional planes, but they will still need some space to pick up passengers and drop them off. For deliveries of goods, they will have to take off from warehouses and land near residential areas where they can deliver their goods, which can be challenging in high density areas.

The company has to be very careful in managing how it launches its product line, and it probably has only one good shot. If it messes up its original launch, it can quickly lose its position and fall behind competition, especially those companies in Asia that are also testing similar products such as EHang ( EH ). Also, since the company is almost constantly raising cash from investors, it doesn't have the luxury to mess up and go back to them asking for more funding. The company's launch plan appears to take a twofold approach. First, it plans to launch to the premium market with high prices and high margins. Once it establishes itself as a premium brand, it can then move onto the mass market and try to generate healthy margins by scaling up to a volume.

Even if the company launches successfully, there will be other points of concern. One possible issue is risk of terrorism. Currently, Americans have to go through vigorous security checks run by the TSA at airports in order to board planes. What will happen when people are able to just take a plane, like taking a taxi? I could see the government having some issues with this, at least in the beginning. Luckily, these planes won't be large enough to cause any damage if they were hijacked and weaponized, but one can never be safe enough.

Apart from terrorism, there are other safety risks too. Humans tend to be very risk-aversive when it comes to trying out new technologies. Earlier this year, we all heard about the tragic accident in the ocean that claimed the lives of five billionaires when they were visiting the ruins of Titanic. Regardless of whose fault it was or whether it was avoidable or not, one thing is for certain. When people hear about these accidents on the news involving new technologies or experimental vehicles, they tend to become very fearful. People won't stop flying in Boeing planes if they see a Boeing plane have an accident, but they might stop flying in Lilium planes if they see one having an accident. Why? Because people tend to be more aversive and apply far more scrutiny when dealing with new technologies and experimental approaches. This means that this product line will have to be safer than regular commercial planes because it will be held to higher standards, at least at first.

The company says it can achieve a cost of $2 per km (or $3 per mile) of distance covered and offer a superior flight experience since its flights would be quieter, involve less vibration and have more cabin space per passenger. While I find this very positive, a part of me also can't help but wonder how these smaller planes would perform when weather conditions are less than perfect. For example, how would they behave under very windy conditions? Would they still offer superior flight experience with limited vibration, or does it only apply when weather is good?

We must give the company credit where it's due, though. It appears that as of December 2023, the company already received orders from 45 companies across the world for about 700 aircrafts. Orders came from a variety of countries including China, France, England, Saudi Arabia, Norway, the US and Brazil. Keep in mind that many of these orders are actually acquisition of "right to order" which gives these companies the option to buy those planes assuming it passes all its tests and obtains all regulatory approvals. Since each country has their own approval process, it could possibly take years before the company clears regulatory approvals in all of these countries. Having said that, obtaining approvals from a few major countries would go a long ways in terms of obtaining it from other countries as well. For example, China is known as one of the most difficult countries to obtain approvals from and if the country could pass China's high regulatory standards, it could obtain approval from many other countries as well.

There is still a lot of work to do both in terms of testing, gaining approvals and gaining support of masses. All those regulatory approvals would mean nothing if the company can't gain confidence of masses who will be buying tickets to travel in its products. If everything goes well, the company will still need a lot of money to ramp up production to meet demand. This would mean additional rounds of capital raises and possibly finding more partners. I am actually surprised that the company isn't going for non-passenger flights first by partnering with e-commerce companies. It would be less risky from a safety standpoint and possibly easier to obtain approvals for. So far, the company has enough funding to keep the lights on for a few years, but it will likely need to raise more cash at some point.

It's hard to value a company that doesn't have earnings. Since the company went IPO a couple of years ago, its stock dropped by almost -90% which indicates that investors don't have a lot of confidence in the company's prospects. One could also say that this is not unique to the company, since we saw a lot of IPO stocks plunge in the last 2 years, especially those without profits. There are also concerns raised by other Seeking Alpha authors that the company's vehicles might not actually perform as advertised due to its design choices. I am not an expert in physics, so I can't comment on that part, but the issue may be worth at least looking at so that investors are well-informed about both sides of the argument.

The company currently has no revenues, and it burned through $249 million of cash in its operations in the last 12 months. It had only $130 million of cash and $200 million of liquid assets left as of last quarter. It's clear that the company will have to raise some more cash sometime next year, especially if it wants to go on mass production anytime soon. Luckily, they don't have a lot of debt because they've mostly used equity to raise cash so far, so they might have some wiggle room there to raise additional funds as needed.

In the future, I could see the company being eventually successful, but it will certainly be a bumpy road. Even if it passes all tests and gains all regulatory approvals, it will have to raise a lot of cash to get to mass production, and this will be quite costly. It will also have to make sure that the first few years to uneventful so that people feel secure and comfortable about using this new mode of transport. I could also see them spending a lot of money on marketing. It could be at least 5–6 years before the company sees any profits, so investors will have to be very patient with this one. If the company can secure some partnerships with major airlines, its path to profitability could be quicker though, so we will have to wait and see.

If investors have faith in this company and its prospects, this should be considered a speculative position, and you should limit it to 1% or less of your portfolio's total value. I would at least wait for another year to see more testing data come in to see if it makes sense to invest in this company in a meaningful way beyond a small speculative position.

For further details see: