Virgin Galactic (NYSE:SPCE) is a $3 billion market value space tourism stock that has almost no hope of making money. Moreover, SPCE stock is likely to drop further this year for a variety of reasons.
At $15.46 per share as of Monday’s close, SPCE stock is off significantly from its 52-week high of $42.49. But it is up dramatically from its recent lows of $6.90. It is still almost 50% above where it traded for most of 2019 — in the low $10 range.
There is very little reason for the stock to trade this high.
Significant Risks With SPCE Stock
For one, Virgin Galactic has just $480 million in cash left on its balance sheet. Its burn rate last year was almost half of that at $223 million. This was the result of its cash flow from operations and investing activities, according to its latest 10-K filing with the S.E.C.
So, in effect, it has less than two years of cash left before it will have to raise more capital that will dilute shareholders. The $3 billion market valuation for SPCE stock seems way too high given this reality.
Second, Virgin Galactic is nowhere near getting revenue-generating operations off the ground. For example, it still does not have a full FAA license that allows them to send astronauts into space.
The company says will submit results of its final configuration of critical systems and human factors performance to the FAA by the first half of 2020. Then the FAA has to approve these. This could take another half-year or so.
Getting Off the Ground Will Be Difficult
Third, even if Virgin Galactic gets its operations off the ground, it will lose money even after taking astronauts to space. One analyst in Seeking Alpha says Virgin Atlantic predicts losses of $104 million in 2020, assuming it makes 12 flights with 66 passengers.
Each of these passengers is expected to pay $250,000 per trip. Moreover, in 2021, Virgin Galactic expects to have 115 flights with 646 passengers resulting in a profit of $12 million.
However, these projections seem highly optimistic, especially since the company has yet to receive full FAA clearance.
In addition, it has conducted only two spaceflights in 2019 on its second spaceship. The first spaceship crashed in 2014 and killed one astronaut and seriously injured another. So, again, it seems like quite a stretch to assume that operations will launch in 2020 and be profitable by 2021.
What The Analysts Say About Virgin Galactic
On March 24, 2020, SPCE stock rose significantly after Morgan Stanley analyst Adam Jonas wrote a bullish report on SPCE stock. He raised his target on the stock to $30, up from $24.
Of course, since then, reality has sunk in the market. And at the end of Monday’s trading, the stock was at $15.46.
Another analyst is not so kind. This Seeking Alpha author calls the stock a “promotion.” The author says the company is likely to have to continue issuing shares to survive. He doubts there is a real market for the company’s product, at least at these prices.
Other analysts point out that the company isn’t it as well capitalized as other competitors such as Blue Origin, and SpaceEx, which are private, as well as Boeing (NYSE:BA). These companies have access to deeper wells of capital than Virgin Atlantic.
What Should Investors Do Next?
This is a highly speculative stock. Don’t count on the company making money any time soon. Is $3 billion the correct market valuation for such a chance play on space tourism?
Consider the odds. The company has only enough money to operate for less than two years. It has only completed two spaceflights. It does not have FAA authority to take on passengers yet. Everything about the value of the company is based on possible future events.
Even if it does make money, it will be several years before SPCE stock will be profitable. Those odds are not very good. I would call it less than 50%, well less than 50% of the company surviving.
So, in the end, Virgin Atlantic will have to raise more equity. That event will likely significantly dilute existing shareholders.
For example, if it was to raise another $500 million to $600 million, that would dilute shareholders by 16.7% to 20%. But that is only if the stock price stays at $15 or so. By the time the capital raise occurs, the price is likely to be at least 50% lower if not more. This is because the market will be anticipating a dilutive capital raise. So the real dilution could be as much as 50% to 75% from here.
Those are not good odds. Look for another opportunity to buy into SPCE stock after another capital raise.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
