News broke Tuesday that Virgin Galactic, Richard Branson’s space-tourism venture, will go public. Virgin Galactic won’t, however, have a traditional IPO. Instead, a special purpose acquisition company, or SPAC, which is already publicly traded, will buy part of the company.
Virgin Galactic had previously raised about $1 billion from outside sources, mainly from Branson himself. In 2017, Branson was in talks with Saudi Arabia’s Public Investment Fund for $1 billion, but the deal fell through after the murder of journalist Jamal Khashoggi.
This paved the way for Chamath Palihapitiya’s SPAC, Social Capital Hedosophia Holdings IPOA, to enter the picture. SCH plans to invest $800 million for a 49% stake in Virgin Galactic, based on Tuesday’s joint announcement. SCH’s $800 million is made up of $700 million in fund money and $100 million of Palihapitiya’s own capital.
As we mentioned, Social Capital Hedosophia is a publicly traded fund, thereby allowing investors to buy stock in Virgin Galactic, with SCH acting as a shell. SCH has been public for about two years, but Virgin Galactic is its first investment. As such, SCH’s share price has not changed much in its lifespan, because it has solely consisted of sitting cash.
Interestingly, SCH stock only jumped 2.11% Tuesday after the deal was announced, meaning investors could think that this was a fairly priced deal. This could also mean that investors are still extremely skeptical about the success of Virgin Galactic and are unwilling to commit yet.
Getting Off the Ground
Virgin Galactic has developed a unique, reusable method of space launch. The suborbital spacecraft is carried to high altitude by a specially built plane, then detaches and uses its rocket to propel itself into low orbit. During descent, the plane slows itself by rotating its wings, then glides down to land on a runway, similarly to the Space Shuttle.
Virgin Galactic holds $80 million in deposits from roughly 600 customers already signed up to be the first commercial spaceflight passengers. These passengers paid deposits as early as 2009. In the past eight months, Virgin Galactic made its first two test flights, successfully reaching space both times. More than 2,500 people reportedly called to inquire about booking tickets after these successful test flights. This demand would see Virgin Galactic book up flights for the first two to three years.
Richard Branson said in an interview Tuesday that he believes the first passenger flights will take place later this year. He has exaggerated timelines in many instances before this, but the successful operational test flights make the statement more believable. Palihapitiya also stated that projections show Virgin Galactic reaching profitability in 2021. He also hopes that investors will look at this like they did Tesla TSLA, seeing the future potential of disrupting large industries. He followed this up with a projection that Virgin Galactic could grow 10x in 10 years, like Tesla did.
Virgin Galactic is not entirely alone in this emerging industry. Three other notable competitors have emerged with legitimate, low orbit, crew carrying capabilities. Elon Musk’s SpaceX has a vertical launch rocket with a crew capsule in development. Amazon AMZN founder Jeff Bezos has a spaceflight venture called Blue Origin, which focuses on vertical takeoff and landing platforms, with applications for passenger spaceflight and moon landing capabilities.
Finally, Boeing BA is currently developing a universal crew capsule for attachment to many different rocket platforms. Boeing’s offering is currently slated for use by NASA, but could easily be adapted to commercial spaceflight.
One of the largest criticisms to this business model is the price of a ticket, which is currently about $250,000. Yet, Branson points out that trans-Atlantic flight cost roughly the same in inflation adjusted dollars when it was first possible. He also states that he hopes prices can be brought down more quickly than with airplanes.
Meanwhile, Palihapitiya indicated that under the hood, Virgin Galactic has the financials and the margins of a software company, in an interview with CNBC. This might make it attractive to investors once commercial flights start to take off.
Virgin Galactic also has a long-term goal of using its technology to provide hypersonic point-to-point travel. This would cut travel times from New York to Shanghai to just a couple of hours. The company believes that this is still five to 10 years out. But, once achieved, if this captures just 5% of the long-distance air travel market, it could provide Virgin Galactic $20 billion in annual revenue.
Virgin Galactic is still a company without a commercial product, but with successful test flights and more applications on the way, it is a promising venture. If commercial flights can actually start later this year, it will hopefully become profitable in the next few years. But Virgin Galactic does, of course, have well-funded competitors to worry about, which makes its ability to get to market first even more vital. Finally, if the company can continue to innovate and use its tech to pull off supersonic spaceflight, it could be the leader in the next breakthrough in transportation.
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