Virgin Galactic rated new outperform at Cowen; price target $22

Cowen initiated coverage of Virgin Galactic at ‘outperform’, with a price target PT of $22, citing a large backlog of demand for commercial spaceflight. The firm also thinks Virgin Galactic’s vertically integrated capabilities can drive high-margin revenue generation beginning in the second half of 2021. Cowen analyst Oliver Chen joins The Final Round to break down his bullish call.

Video Transcript

MYLES UDLAND: Today, we are talking about Cowen's initiation of coverage on shares of Virgin Galactic. The firm rates the stock outperform. $22 price target. We're joined now by Oliver Chen, an analyst over at Cowen on the team that worked on this note. So, Oliver, let's just kind of start with the highest level thesis here on what you guys see as the biggest opportunity for Virgin Galactic and why you're so excited about the stock here.

OLIVER CHEN (ON PHONE): Yeah. Hi, Myles. Thanks for having us. We're excited to be here. So this company is really unique in that it combines the valuable Virgin lifestyle brand equity with proprietary technology developed with the billion dollars of investment made to date in vertically integrated aerospace development capabilities.

So these three things combined really present a unique opportunity, and there's lots of existing demand. They have 600 future astronauts who have secured their spots. This is a luxury good. It's $250,000 to take a ride on the space ship. And also, this is early stage. There's no revenue generation yet.

So there's lots of catalysts ahead. But as we look ahead, the future of retail, the future of luxury goods is actually not goods at all. It's experiential. Less is more. And rethinking luxury in terms of the experiences you have, this fits in quite nicely.

MYLES UDLAND: And so, you know, you mentioned that the company hasn't generated any revenue yet, and yet in the note here, you say you think there's visibility to being positive on a free cash flow basis in just five years. How quickly, I guess, do you expect-- I guess the answer would be fairly quickly. But what's the kind of stylized timeline, I guess, you have on when we're going to see Virgin sending folks to space and seeing that deep reservation list, I guess, start to actually get run down here?

OLIVER CHEN (ON PHONE): Yeah, Myles. A key catalyst is Sir Richard Branson flying in 2021 and then commercial spaceflight for guests starting sometime after that, late 2021, 2022. And we have that ramping up to $1 billion of revenue by 2030.

You are really constrained by the number of space ships. For example, we have the capacity growing to about 3,000 guests over time just because the space ships can't do more than five flights per month. So there is a big supply constraint. And that's another hallmark of luxury goods.

We did a consumer survey at Cowen. There's as many as two million plus people who have the money and who are interested in this opportunity. A lot of demand, and it will be supply constrained. And as we break down the numbers, there's two parts to this business, the commercial spaceflight business as well as the high speed, point-to-point travel opportunity, which is a separate opportunity as well.

DAN ROBERTS: Oliver, Dan Roberts here. It's very interesting when you say that Virgin benefits from kind of the brand equity even though, obviously, this part of the business is different from, I would say, the businesses that built that brand equity. I mean, of course, it's still a flight in a sense. But then, there was Virgin, you know, which a lot of people remember for the mega stores, even if those have largely gone away.

But I guess what I'm really asking is if you think that bullishness on this business is, in many ways, colored by Richard Branson himself and kind of the outsized personality there gives a lot of the sheen that a lot of analysts have about this business or if it really is about the fundamentals? I mean, so many people when they talk about this business are really just talking about the exciting celebrity space race between Branson, Musk, and Bezos.

OLIVER CHEN (ON PHONE): Yeah. I think you bring up a lot of great points because luxury travel and the reality of this is about balancing functions, emotions, and aspirations. And space forever will have a special place in people's minds and hearts about discovery. So there's a huge part about the brand and the experience.

And don't forget a lot of what happens with luxury goods is it's really the happiness pre- and post-purchase. So it's a four day program, and it's more than just a travel to space. It's joining a membership in a way. So that really changes the game.

The Virgin Galactic brand brings very strong household awareness. And also, what really plays in this whole experience is every part of the experience from the space cabin to the spaceport. And there's a new CEO from Disney. So this experiential component will set Virgin Galactic apart.

And also, the technology is horizontal. So it's a lot more customary in terms of the actual experience relative to competitors, such as Blue Origin, which don't have pilots. Virgin Galactic has two pilots. Also, it's 90 minutes in space. And it's a horizontal takeoff and landing.

SEANA SMITH: Hey, Oliver. It's Seana. I want to go on what you keep bringing up, and that's the word experience and this experiential opportunity that you're seeing Virgin Galactic have. When we think about how consumer behavior is shifting, I'm just curious, what are some of the other areas or some of the needs that you see also exceeding based on this thesis, based on this experiencial opportunity that you point to as one of the most important factors here going forward?

OLIVER CHEN (ON PHONE): Yes, Seana. So LVMH acquired a high end hotel chain called Belmond. And that's another-- they also own the 21 Club and other properties, the Cipriani hotels. I think that's key to what's happening with the consumer over time.

And then, retail in general. The future of retail is really thinking of stores as experience points, as service points, as experiencing the craftsmanship in a flagship. Everything's changing. And I think that as we think about the Uberfication of retail at large and retail as a service, this plays into that broader theme.

So we're excited about brands that build communities as well. And that includes brands like Peloton and health and wellness. We're excited about LVMH and what they're doing with how experiential is moving away from material and also being a leading platform there. And then, we look at a lot of private brands too that are really focused on driving community. I think the future is a lot more about purpose and mission and not necessarily about collecting more stuff.

MYLES UDLAND: And then, Oliver, very quickly, finally, is that-- so does COVID not change this kind of thesis? Does this accelerate this thesis? How are you thinking kind of through what we've seen in just the last couple months?

OLIVER CHEN (ON PHONE): They've managed through this well. However, it adds complications in terms of the speed and timing just because of the reality of making sure the workforce is safe. That being said, to be able to afford this kind of ticket, this demographic definitely has high net worth and wants to do this. Also, our surveys really say that customers will pay even more to be earlier in the queue.

So the demand is still very, very strong, but safety will be a priority. And there's still FAA certifications up ahead to be had. And the crisis has made them more conservative in terms of timetables.

MYLES UDLAND: But, of course, as you mentioned, high net worth is really the target here. As we speak, the NASDAQ is at another record high, right? Oliver Chen, an analyst with Cowen, again, the firm initiating coverage on Virgin Galactic. Outperform rating. $22 price target. Oliver, thanks so much for joining the program.

OLIVER CHEN (ON PHONE): Thanks for having me.