Virgin Galactic Holdings Inc. (NYSE:SPCE) is not doing well despite achieving a significant milestone in space tourism.
Last Thursday marked a significant moment for the company as it launched its inaugural commercial spaceflight, generating revenue and propelling the Galactic 01 mission into the sky. This groundbreaking journey transported three Italian Air Force pilots to the boundaries of space, ensuring their safe return to Earth.
Adding to the excitement, the company recently announced it is preparing to embark on yet another revenue-generating mission, Galactic 02. Set to take place in August, this upcoming venture highlights the company's unwavering determination to pursue successive missions. Moreover, Virgin Galactic has solidified its commitment by confirming plans to initiate monthly space tourism flights following the successful completion of Galactic 02.
However, despite the positive development, the stock's performance is disappointing. It appears to be a classic case of the investment strategy known as "buy the rumor, sell the news." Based on rumors and speculations, investors had bid up its shares significantly earlier this month. Now that the good news has come and gone, they are attempting to cash out whatever remains of their winnings.
Needless to say, Virgin Galactic does not appear to be receiving the appreciation it deserves.
This discussion aims to shed light on the company's future trajectory, particularly its financial prospects. In recent years, the common trend among growth-oriented companies has been heavy capital investments, followed by a significant influx of cash. The key concern, however, revolves around when the company will generate revenue and fulfill investors' expectations.
Investing in any industry carries inherent risks, and accurately predicting the future of the global economy is impossible. Unforeseen events like global pandemics can disrupt even the most accurate projections. Regarding industries like space tourism, the risks are particularly high. Only a few companies operate in this sector, and even fewer possess the financial resources necessary to address the immense challenges.
Unfortunately, Virgin Galactic currently finds itself in a similarly precarious situation. The first quarter of 2023 proved challenging for the company as it reported a net loss of around $159 million. This figure represents a substantial increase compared to the net loss of $93.1 million reported in the third quarter of 2022. The consecutive growth in losses is concerning and highlights the financial difficulties the company is currently facing.
The company's financial situation is a cause for concern as its losses have surpassed $566 million in the past year alone, and this negative trend continues persistently quarter after quarter. The magnitude of these losses underscores the ongoing challenges and raises questions about its ability to achieve sustainable profitability.
SPCE Data by GuruFocus
To put this into perspective, Virgin Galactic's current rate of losses indicate it has no more than a year and a half before its financial resources are depleted entirely. This predicament stems from the company's limited remaining cash, cash equivalents and marketable securities, which total around $874 million. The relatively low amount of available financial resources further accentuates the company's challenges in addressing its financial situation and sustaining its operations.
Competitive landscape and risks
Virgin Galactic faces potential delays for its future flights. Adding to the challenge, the company's major competitor, Blue Origin, has recently announced plans to resume its flights, potentially overshadowing its achievements. Launch failures, as exemplified by Astra Space Inc.'s (NASDAQ:ASTR) 26% share price drop, further increase the risk for investors in the space stock market.
The inherent risks of offering commercial spaceflights in an unproven industry leave investors uncertain about the feasibility of running flights at scale and generating profits. Unfortunately, Virgin Galactic's negative cash flow is expected to persist for several years. Any additional delays in scaling commercial spaceflights from its Spaceport America could impact its revenue potential.
Nevertheless, initiating commercial spaceline operations marks a significant milestone for Virgin Galactic following numerous setbacks and delays. Investors have been eagerly awaiting revenue-generating activities. Although negative cash flow is anticipated in the coming years, the company expects a substantial revenue increase over the next four years, potentially leading to a positive reassessment of its shares.
Strategy and market potential
Virgin Galactic aims to capitalize on the growing space tourism market, which is projected to reach $12.6 billion by 2031, according to Allied Market Research. The company's Delta Class ship, with a $50 million to 60 million construction cost, can generate $2.7 million in revenue per flight at full capacity. The company has received 800 reservations and $345 million in customer deposits to date.
To reach the break-even point, the company estimates it will need to have approximately 225 to 250 flights per year. This figure serves as a crucial benchmark in understanding the operational scale needed for the company to generate enough revenue to cover its expenses and achieve financial equilibrium.
While Virgin Galactic has experienced losses since its initial public offering in 2019, revenue-generating activities are expected to help mitigate future losses. Despite the positive prospects, it's important to note the company's valuation is currently high. However, the expectation of rapid revenue growth following the commencement of commercial operations could potentially justify the valuation in the future.
Opportunities and challenges ahead
In conclusion, Virgin Galactic faces opportunities and challenges following its first commercial flight. While potential delays and competition from rivals pose risks, the company's entry into the space tourism market signifies a significant milestone and holds promise for investors.
The path ahead may be uncertain, with negative cash flow expected soon. Still, the anticipation of revenue growth and the potential for profitability in the future provide a glimmer of hope. As Virgin Galactic strives to navigate the uncharted territory of commercial spaceflights, its success or failure will undoubtedly shape the trajectory of the emerging space tourism industry.
This article first appeared on GuruFocus.