It’s Too Early to Think Long-Term About Virgin Galactic

Cash burn for SPCE will accelerate as commercial launch nears

The very fact that Virgin Galactic Holdings (NYSE:SPCE) is the first and only listed company to focus on commercial human spaceflight is enough to generate tremendous investor interest. After the public offering and listing, SPCE stock did skyrocket to $42.5.

SPCE Stock: It's Too Early to Think Long-Term About Virgin Galactic
Source: Tun Pichitanon /

However, as the initial investor exuberance declined, the stock has trended lower. Currently, Virgin Galactic stock trades near $15.60 and I believe that it’s still too early to consider long-term exposure.

The U.S. Chamber of Commerce believes that the space industry is likely to swell from $385 billion in 2017 to $1.5 trillion by 2040. This implies an annualized growth rate of 6%.

Further, the company’s annual report cites Credit Suisse Research that in fiscal year 2019, there were 2 million high net worth individuals globally. This presents a significant market opportunity for Virgin Galactic.

As a matter of fact, the company launched a “one small step” initiative in February. As of April, the company received $1,000 refundable deposit from 400 customers. This represents $100 million in future potential revenue upon full ticket payment.

With interest coming from 44 countries, there seems to be growing interest. With a first-mover advantage, Virgin Galactic is well positioned to capitalize on this opportunity.

The Medium-Term Concerns

Even with these potential long-term opportunities, there are multiple factors that can keep SPCE stock sideways to lower.

For the first quarter of 2020, the company reported adjusted EBITDA loss of $53 million. In addition, the company reported cash used in operations of $56 million. This implies an annual cash burn of $225 million.

The positive point is that Virgin Galactic reported cash and equivalents of $419 million for Q1 2020. However, there is still no timeline on positive cash flows. Therefore, I do expect the listed entity to pursue equity dilution.

It’s worth noting that the company has provided an estimate on revenue based on initial bookings. However, there is still no clarity on the cost and the trips required for break-even once operations commence. The company has however mentioned that operating cost is expected to increase in the coming years as it moves towards commercial launch.

These uncertainties will translate into SPCE stock trading sideways.

Another factor is the level of penetration the company can achieve in the potential addressable market. As an example, in their latest annual report, Royal Caribbean Cruises (NYSE:RCL) has provided insights on cruising industry penetration. In North America, the penetration is just 3.89% with the penetration in Europe even lower at 1.41%.

Therefore, it might take time for the idea to gain traction and it would imply an extended period of cash burn.

In an industry that’s at a nascent stage, there are growing number of interest players. This would also impact the growth potential considering the limited addressable market. Space X, which is being headed by Elon Musk, CEO of Tesla (NASDAQ:TSLA) is a potential competitor.

Similarly, Blue Origin, is founded by Amazon (NASDAQ:AMZN) CEO Jeff Bezos and is a “privately held space venture.”

My Concluding Thoughts on SPCE Stock

Besides the venture into human space travel, Virgin Galactic has also collaborated with the NASA for high Mach vehicles. The company already derives revenue from contracts with the NASA and the U.S. government. Government contracts can boost cash flows and is a possible game changer.

For now, the company is in a phase of cash burn, which will accelerate as commercial launch nears. I expect dilution of equity in the coming years and that can take SPCE stock lower.

The business idea is exciting, but might take time to gain traction. Even if the stock does not have sharp downside from current levels, there are no immediate positive triggers. I would therefore remain on the sidelines, but keep the stock in the investment radar.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.

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