After plummeting around 80% in one year, Virgin Galactic (NYSE: SPCE) is now in penny stock territory. As I write, it’s trading for $0.85 (67p), down from $55 just three years ago.
Is this a golden opportunity for me to snap up some shares on the cheap? Let’s find out.
Another mission completed
Founded in 2004 by Sir Richard Branson, Virgin Galactic aims to usher in an era of commercial space exploration by regularly taking customers to the edge of space.
On 8 June, the firm successfully completed its 12th mission and seventh commercial spaceflight. It carried three private astronauts and a researcher who carried out various experiments, including whether insulin pens can administer accurate insulin doses in microgravity.
After years of setbacks, the company has settled into a steady cadence of successful flights, moving closer to its founding mission.
However, in the words of Porky Pig at the end of the Looney Tunes cartoons, “That’s all, folks!” Well, at least for now. That’s because this was Virgin Galactic’s last spaceflight before it pauses commercial operations for two years to upgrade its fleet to next-generation Delta Class spaceships.
Cash concerns
That’s right, the firm will be generating essentially zero revenue for at least the next 18-24 months. Yikes!
The immediate thing to consider here then is whether the company has enough cash to see it through this period. At the end of Q1 (31 March), it had cash and marketable securities of $867m. However, it only generated £2m in quarterly revenue while burning through $126m in cash.
A slightly lower rate of burn is expected in Q2 ($110m-$120m). Even if we assume that falls by a few million per quarter during the hiatus, it looks nip and tuck on whether that cash will survive eight quarters.
Remember, the company is building two new ships from scratch and they’ll cost approximately $40m-$50m each. Then there’ll be all the necessary flight tests before commercial operations restart.
Unfortunately, with the stock trading so low, the option of raising the necessary cash by selling more shares doesn’t look viable. It might have to strike up partnerships or reach out to a mercy investor.
Should I get on board?
Assuming Virgin Galactic gets through the forthcoming period though, the unit economics of the new spacecraft look very attractive (in theory).
The two ships will carry six passengers each at a cost of $600,000 per passenger, translating into revenue of $3.6m per flight. And the firm is aiming for 125 of these trips for a total of $450m in annual revenue, with a contribution margin of at least 75%.
However, one problem here is that the company still has a backlog of around 800 passengers to get through. And they’ve either paid $250,000 or $450,000.
Therefore, even if the firm executes perfectly with no delays, it’ll presumably be well into 2027 before the $600,000 prices kick in.
Will the ongoing losses engulf the firm before it ever reaches profitability? It’s a massive risk, and one which seems largely responsible for the stock’s collapse.
Moreover, rival Blue Origin has just restarted spaceflights with six paying customers on board. Backed by multibillionaire Jeff Bezos, it has few cash concerns.
I love Virgin Galactic’s ambition. But given the enormous uncertainty here, I’d rather invest elsewhere.
