Virgin Galactic: Branson’s Decision Leaves Shareholders Uncertain
Contributor since 2023 / 1735 Followers
Summary:
- Virgin Galactic shares fell 17% after Richard Branson said he had no plans to invest more in the company as it has enough funding to be FCF positive.
- The space industry has high barriers to entry, but competition from Blue Origin and SpaceX may make Virgin Galactic less attractive to customers.
- Virgin Galactic plans to be cash-flow positive by 2026 with the launch of its Delta ships, but revenue projections may be too optimistic.
Drew Angerer
Thesis
The news that Richard Branson does not plan to invest further in Virgin Galactic has spread like wildfire and unsettled shareholders. As a result, the stock fell 17% in one day. His reasoning is that he thinks the $1.1 billion in cash Virgin Galactic (NYSE:SPCE) has is enough to fund it until the company is FCF positive. The timing of Branson’s statement is not the best for existing shareholders, as the stock is down more than 50% since I last wrote about the stock earlier this year and gave it a Sell rating.
In my opinion, the liquidity reserve may not be sufficient, and I also think that the Delta flights may start later than planned. And even if they start in 2026, it may not be enough to generate positive FCF in that year. So let’s take a look at the last earnings call and the numbers.
The Positives About Virgin Galactic And The Industry
The space industry still has one of the highest barriers to entry, with numerous regulatory hurdles and years of R&D investment required for a company to participate in this market. In addition, the competition for employees is fierce, as some of them have knowledge that is critical to success. The fact that Virgin was able to make the first flights is therefore a great success, and new entrants in this sector are already years behind and would have to catch up.
So in the future, if two or three companies were to divide this market among themselves, they could earn high returns on capital and almost dictate prices. But in my opinion, Blue Origin’s (BORGN) and SpaceX’s offerings might be more attractive to potential customers because they seem to offer a better experience and they seem to be better funded. But Virgin could serve a niche and be successful there, as the future is mostly uncertain and maybe the new Delta ships will be a big success.
SPCE’s Q3 Results
In total, Virgin has now done six spaceflights with the USS Unity in the last ~ 6 months, and starting with Galactic 06, all 4 seats will be paying customers. In mid-2024, however, they will halt Unity spaceflights to cut costs and focus on the Delta ships. This is a decision I fully understand because they see the revenue and margin potential with the Delta ships as more attractive and therefore want to reduce costs until they have two Delta ships in service in 2026, which is their target.
Ground and test flights with Delta are targeted for 2025, with commercial flights beginning in 2026. However, as we all know with Virgin and their timelines, these are sometimes very optimistic. So 2024 and 2025, and maybe even 2026, will be characterized by almost no revenue because of the grounded flights and cash burn because of the investment in Delta. With an additional annual cost of about $50 to $60 million per Delta spacecraft, the $1.1 billion in cash could quickly be gone, as $100 million or more in quarterly operating expenses is within the realm of possibility.
Operating expenses this quarter are down from $146 million last year to $116 million this year, but the guidance for Q4 is $125 million to $135 million, so $400+ million for the next year could be a good bet if you factor in the cost savings from the flight suspension. The revenue from the flights is completely irrelevant at the moment, as the revenue in Q3 was only $1.7 million and therefore far from covering the operating expenses.
Here Is How Virgin Galactic Plans To Become FCF Positive By 2026
The Delta ship, which will have a lifecycle of about 500+ flights, has a target of 2 flights per week, which they updated from 1 week per flight. Therefore, the target number of flights per month is 8, and the revenue per flight is estimated to be between $2.7 million and $3.6 million. The revenue per flight is $450k to $600k per seat and Delta has 2 more seats than the current fleet, so 6 paying customers can be accommodated.
Since there are 52 weeks in a year, and they will be flying twice a week, that makes 104 flights.
- 104 x $2.7 million = $280.8m
- 104 x $3.6 million = $374.4m
So the revenue for 2026 will be between $280 million and $374 million. I really cannot see how that will be enough to be FCF positive in that year. I mean operating expenses in 2022 were already $500 million and each new Delta ship costs about $50 million to $60 million plus they have to pay all the maintenance costs, R&D, wages, etc., so I really think that will be not enough revenue. Even with additional ships, it will be difficult to achieve positive FCF as costs will also increase, so even a doubling of revenues may not be enough to cover expenses.
In addition, they will probably burn $400 million to $500 million every year until Delta starts flying, which could also deplete their cash reserves. Also, these numbers are goals that may or may not reflect reality. If they were only able to make 1 flight a week, the situation would be even more troublesome.
They say they could charge customers more for tickets, but first, they have to deal with the waiting list of about 800 people. And there are some people who only paid $200,000 to $250,000 for the tickets that they have to serve. An update on how ticket sales are going, if people are canceling, and if the waiting list is growing or not would be interesting. This would give a good picture of the demand situation.
Conclusion
Virgin Galactic remains a polarizing investment with many fans who believe in its success. And the management team has done a good job of raising money at the right time to keep the company afloat, but unfortunately not always to the benefit of shareholders. If they ever manage to become FCF positive, the stock could be worth many times what it is today. However, that is a long way off, and I could see more pain for shareholders over the next 2 or 3 years. The fact that Branson will no longer be pumping money into the company is unfortunate, but I think everyone should have known this was going to happen and that they would probably try other ways to raise money.
Therefore, I am maintaining my Sell rating until I see major progress on Delta flights and the cash burn situation.
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