Shares of aerospace and space travel company Virgin Galactic (NYSE:SPCE) have underperformed the broader markets. Moreover, this penny stock has been trending lower, losing over 56% (see the graph below) of its value in the past three months. While the company has completed four spaceflights in four months, concerns around cash burn and profitability have weighed on its stock price.
Cash Burn a Concern
During the Q2 conference call, SPCE’s management said that the company expects its monthly commercial service cadence to begin in August. The company plans for two commercial spaceflights in Q3 and three in Q4. Given the start of the commercial services, the company projects about $1 million in revenues in each quarter.
While its top line is expected to get a boost from commercial service, the higher cash burn remains a concern. Investors should note that Virgin Galactic has increased its capital expenditures for constructing the spaceship assembly facility in Phoenix and on the technology used in the design process for Delta Class vehicles. Given the continued investments, it expects to deliver a negative cash flow of $120 million to $130 million in Q3 and Q4.
Following management’s cash flow outlook, Goldman Sachs analyst Noah Poponak said that the company’s commercial flights “drive low revenue compared to the cash flow burn expectations” for the second half of 2023.
The analyst added that SPCE’s business model requires scale to turn profitable, which will come from the Delta Class vehicles. However, the analyst doesn’t expect the Delta Class vehicles to fly until 2026. Poponak reiterated a Hold recommendation on SPCE stock on August 4. While Poponak remains sidelined, let’s look at the Street’s consensus estimate for Virgin Galactic stock.
Is Virgin Galactic a Hold or Sell?
Virgin Galactic stock has received three Hold and three Sell recommendations, translating into a Moderate Sell consensus rating. Further, as its stock has lost substantial value, analysts’ average price target of $3.50 implies 83.25% upside potential from current levels.
Bottom Line
The start of commercial spaceflights is a positive development for the company and will likely drive revenues. However, its guidance shows that its cash burn rate would outpace its revenue generation capabilities in the short term. Moreover, as the company is burning cash, it might raise funds in the future, leading to equity dilution.
Given the near-term headwinds and analysts’ Moderate Sell recommendation, investors should exercise caution before investing in Virgin Galactic stock. Meanwhile, investors can use TipRanks’ penny stock screener to find other attractive Penny stocks.
