It's finally happening. "New Space" -- the group of companies exploring new ways to build rockets, launch satellites (and people) into orbit, and commercialize the next frontier -- is finally turning into a concept you can invest in.
Case in point: A couple of months ago I offered up a couple of space ideas for consideration: space launch start-ups Vector and Virgin Galactic. Both were on record as wanting to do an initial public offering at some point.
Last week, one of them basically took a step to do that.
Image source: Virgin Galactic.
To infinity, and beyond
In an announcement that set space headline writers to working overtime, Virgin Galactic founder Sir Richard Branson announced on Tuesday that his company is merging with publicly traded shell company Social Capital Hedosophia Holdings (NYSE: IPOA). The transaction will effectively transform Virgin Galactic into a publicly traded New Space company -- without any of the bother of undergoing a traditional IPO process.
The merger, slated to take effect sometime in the next six months, will see Social Capital shareholders acquire 49% of Virgin Galactic's equity, but leave current Virgin Galactic CEO George Whitesides in managerial control. More importantly to investors, it will create "the first and only publicly traded commercial human spaceflight company" that you can invest in directly.
What you get when you invest
But should you invest in Virgin Galactic? Let's go over a few numbers.
According to the companies, once this merger is complete, the publicly traded version of Virgin Galactic will have an enterprise value of $1.5 billion. While the details are convoluted, it appears from data provided by S&P Global Market Intelligence, and SEC filings, that the company is expecting its market capitalization to be about $2 billion, offset by as much as $500 million in cash (and marketable securities easily convertible into cash) after the merger.
This cash will be a valuable resource for a company that has yet to put its first paying customer into space.
What this deal means to investors
Speaking of which, the companies' joint press release does not state precisely when Virgin Galactic will begin generating revenue. It does, however, suggest that Virgin Galactic will have revenue by at least 2023. Indeed, at $1.5 billion in enterprise value, the company asserts it will be valued at 2.5 times 2023 revenue after the merger -- which implies the company will go from zero to $600 million in annual revenue over the next five years.
How likely is that?
A few more numbers: We've heard that Virgin Galactic is planning to sell tickets to ride its SpaceShipTwo rocket ship into space (and back again) for about $250,000 a pop -- but that price may already be falling. According to the companies, 600 customers have signed on the dotted line so far, worth "$120 million of potential revenue." This implies that the actual ticket price may be closer to $200,000.
Simple math, therefore, tells us that in order to rake in $600 million in annual revenue from ticket sales, Virgin Galactic will need to be selling 3,000 tickets per year by 2023. And given that SpaceShipTwo is designed to seat six passengers, it would appear that Virgin Galactic will need to fly 500 times per year in order to reach its promised level of $600 million in annual revenue.
There's just one (actually, two) problems with that: According to UBS, at ticket prices of $250,000, the market for space tourism is probably big enough to support only about 50 flights (300 customers) per year, worldwide. Now, Virgin Galactic could probably increase demand by lowering prices -- indeed, it may already be doing so! But collecting less money per trip would make it proportionately harder to reach the promised goal of $600 million in annual revenue.
So, if space tourism is all Virgin Galactic does, then $600 million in annual revenue by 2023 doesn't seem likely. Granted, the company might well have other tricks up its sleeve. It might build larger spaceships to carry more passengers at lower prices, for example. Virgin's parent company also has a nascent satellite launch business in the works, dubbed Virgin Orbit, and SEC filings related to the merger refer to "the provision of certain services among" these companies.
If Virgin Galactic teams up with its sister company Virgin Orbit to offer satellite launch services, this might offer the potential for another revenue stream, and one not dependent on demand for space tourism.
There are still a fair number of unknowns in this story. Then again, Virgin Galactic's story is just beginning. We'll be following along -- and making sure you, the investor, have the facts you need to decide whether this New Space opportunity could be a good investment.
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