Founded by Sir Richard Branson, Virgin Galactic (SPCE) is a vertically integrated aerospace company that is pioneering human spaceflight for private individuals and researchers. It is also a manufacturer of advanced air and space vehicles. I am neutral on SPCE stock. (See Analysts’ Top Stocks on TipRanks).
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The company is using its proprietary and reusable technologies to develop a spaceflight system designed to offer customers (which the company refers to as “future astronauts”) a unique, multi-day, transformative experience.
This includes a spaceflight that features views of Earth from space and several minutes of weightlessness that will launch from Spaceport America, New Mexico. Virgin Galactic has successfully sent Sir Richard Branson and his team to the edge of space back in July.
With several trends and billionaires pursuing their “going-to-space” dreams, the commercial space industry has been invigorated over the past decade. Rapidly developing technologies, declining costs, open innovation models with refined access to technology, and higher availability of capital have stimulated interest in the commercial space market.
The Problem
Virgin Galactic’s Q2 earnings results revealed that despite the company’s success in sending its crew to the edge of space, the truth is that the business remains in the pre-revenue stage.
The $571,000 in revenue that Virgin reported for the period was the government’s grant for the company to conduct scientific research for its upcoming flight. In terms of the company’s core business model, which comprises the sale of flight tickets, no cash was generated.
No cash generation should continue to be the case for quite some time, with management sharing no tangible plan to grow Virgin’s top line in the medium term.
Simultaneously, with Virgin’s business model being capital intensive and R&D-demanding, the company continues to drain its cash reserves. Virgin’s GAAP EPS during Q2 was -$0.39, missing estimates by $0.06 and losing $94 million in total, an even higher loss from $72 million a year ago. I need to stress the fact that Virgin has no path to profitability.
If the company is losing this much money during the pre-revenue stage, then scaling the actual business will consume additional cash, which is certain to further delay profitability.
Also, who knows if the business model’s margins will even be worth it by then? Or, what if a competitor like Blue Origin will have developed a substantially better service, knocking Virgin Galactic off?
The truth is, uncertainty is beyond the stratosphere. There is absolutely no way to know if Virgin will ever be able to have a “business” at all.
With $551.6 million in the bank, it won’t be long before Virgin dilutes its shareholders significantly in an equity offering soon. Not to mention, the $5.2 billion market cap is likely much too high for a company with zero revenues and no path to profitability as far as we currently know. As a result, it’s not even possible to assign a valuation multiple to the stock at this point.
Wall Street’s Take
Turning to Wall Street, Virgin Galactic has a Hold consensus rating, based on four Buys, three Holds, and three Sells assigned in the past three months. At $30.30, the average Virgin Galactic price target implies 49% upside potential, nonetheless.
Final Thoughts
While Virgin Galactic could end up being a winning bet in the commercial space industry, it looks like a wild bet. At least not one I am willing to take. For this reason, I am neutral on the stock.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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