Virgin Galactic: Pipe Dream Business Still Lacks Meaningful, Sustainable Model

Summary:

• Virgin Galactic has a sensible balance sheet but is plagued by massive losses and minimal revenue, making it a risky investment.
• The company’s strategy to lower operating costs and expand capacity is challenged by an uncertain market for commercial spaceflight.
• Economic sensitivity and safety concerns further jeopardize Virgin Galactic’s potential, with discretionary spending likely to decline in economic downturns.
• Despite the futuristic appeal, the company’s history and financial projections indicate it’s not a viable investment; I recommend a strong sell.

When I was a kid, I was fascinated by space travel and studied heavily on the subject. If you’d asked six-year-old me, I’d absolutely expect there to be multiple, highly important space companies by now.

Today, we’ll be looking at one of the bigger space companies, Virgin Galactic Holdings (NYSE:SPCE). The company has been beaten down quite a bit lately, with a 1 for 20 reverse split back in June seemingly not the end of the bad news. We’ll be looking at the business from the point of view of profitability and growth, and asking whether this is a potential contrarian play.

Understanding Virgin Galactic

Founded in 2004, Virgin Galactic styles itself as delivering a “consumer space experience,” involving reusable spaceflight systems. The company will, for a price, fly passengers and scientific payloads into space.

The company declares the industry to be “growing dramatically” in the future, and anyone even remotely familiar with the American fascination with science fiction can see how those involved in the industry would imagine they’re in on the ground floor of something that could be huge.

Space tourism is still a very small business, however, and prices are such that it is purely for the very wealthy at this point. Indeed, Virgin Galactic has only performed a handful of spaceflights in its entire operating history.

The company’s stated strategy is to lower its operating cost for getting passengers into space and to further expand its capacity with more costly vehicles.

Balance Sheet

Cash and Equivalents	$182 million
Total Current Assets	$844 million
Total Assets	$1.06 billion
Total Current Liabilities	$179 million
Convertible Senior Notes	$419 million
Total Liabilities	$668 million
Shareholder Equity	$395 million

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(Source: Most recent 10-Q from SEC)

For a fledgling company that has barely any customers and envisions itself as at the fore of a growth industry, Virgin Galactic has a surprisingly sensible balance sheet. The company has debt, to be sure, but it also has cash outstanding roughly in line with the current stock price.

In fact, the company is trading at a surprising discount to book, with the price/book ratio at 0.50 right now. If there is an underlying business worth having, this could make it a potentially very appealing play.

The Risks

Now for the risks. For the appealing balance sheet we just looked at, Virgin Galactic has a history of massive losses, dropping around $500 million per year in net losses. For a company this size, that’s hard to sustain, and at some point, that shareholder equity could be eaten up by the costs of running a space-faring enterprise in the early 21st century.

Secondly, despite the company’s declaration that spaceflight will be growing dramatically, they readily concede that it is not at all clear how big of the market for commercial spaceflight there will even be. It all sounds futuristic and exciting, but is the marketplace going to be big enough to support the company in the medium term?

The spaceflights that they’ve carried out are seemingly in the slowdown, with reports of a planned pause for a while as Virgin Galactic is working on a costly next-generation set of spaceships to replace their early models.

Space travel is also likely going to be very sensitive to economic conditions changing in the future. Going to space for a trip is clearly discretionary spending at this point, and if the economy slows, it is likely people will be putting their travel plans on hold.

Spaceships are also not the safest of craft in this day and age, and what interest there is in Virgin Galactic’s services could rapidly dry up with one or more calamitous accidents.

Finally, the continuation of the business with all of its losses is going to require considerable additional funding. Without a functioning business with a proven model, there’s no guarantee they’re going to be able to find the money they are going to need.

Statement of ‘Operations,’ or Lack Thereof

	2021	2022	2023	2024 (1H)
Revenue	$3.3 million	$2.3 million	$6.8 million	$6.2 million
Operating Income	($323 million)	($502 million)	($532 million)	($213 million)
Net Income	($353 million)	($506 million)	($495 million)	($196 million)

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(Source: Most recent 10-K and 10-Q from SEC)

As mentioned before, Virgin Galactic is losing catastrophic amounts of money and barely has any operations to generate its meager revenue. The second quarter of this year saw them trim losses slightly with revenue from space tourism. That’s not to say that the company wasn’t losing money, because it was, and the planned transition to next-generation spaceships is going to slow what could be charitably called its near-term growth.

Estimates are that the revenue of 2024 will come in at $6.2 million, with a loss of $15.43 per share, which you’ll notice is far more than the company is even worth. 2025 will continue to be operating at a snail’s base, with revenue projected to be $1.1 million and losses again a huge $11.74 per share.

Conclusion

I want to like the idea of commercial space travel in my lifetime, I really do, but the company’s two decades of history tells me the time just isn’t right for this sort of company. I’m viewing it as a strong sell.

Virgin Galactic to me screams a pet project from some idealist that likely will never make a dime in any real way. Even the sensible balance sheet that the company has right now looks set to evaporate in less than a year’s time, and there is absolutely no indication that the company’s management is looking to revise its business model to be something that could be a profitable venture and something reasonable to do with all the money they still haven’t burned through.

Saying commercial spaceflight isn’t viable right now may sound overly pessimistic and along the same vein as the 1903 New York Times editorial which panned air travel, but the data doesn’t lie. This just isn’t going to be a profitable company, and investors should avoid it like the plague.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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