[Editor’s Note: This article was updated to remove some incorrect information.]
Virgin Galactic Holdings (NYSE:SPCE) stock is generating a lot of interest lately. Some of that is due to news surrounding the company and its charismatic founder, Sir Richard Branson, while a lot of it has to do with Elon Musk and Space X.
A fortnight hasn’t passed since the National Aeronautics and Space Administration, and SpaceX sent two astronauts to the International Space Station. A landmark event that was a decade in the making, it nudged Tesla (NASDAQ:TSLA) and SPCE stock slightly higher. It also led to heated discussions regarding the future of space exploration and related investment opportunities.
Space exploration is still a novel concept, and there’s not a lot of financial data surrounding this area at the moment. That’s why investing in stocks like SPCE feels like a gamble. At the moment, these companies are burning through cash to come up with new and innovative products and services. However, their commercial viability is unknown at this stage. I am never fond of playing Russian roulette when it comes to investing, so I would steer clear for now because of the sector’s inherent unpredictability.
In addition, Virgin Galactic’s fortunes are deeply intertwined with the broader Virgin Group in general, and Virgin Atlantic in particular. Global air travel nosedived as a result of Covid-19, and although there are signs of life, it will likely be a slow recovery.
Virgin Atlantic and other commercial airlines are bearing the brunt of the crisis and hope for a bailout from the British government. In the meantime, Branson is selling 25 million shares of his stake in Virgin Galactic to drum up funds.
We often refer to space as the great unknown. I feel the same for companies focused on exploring space at the moment.
Virgin Atlantic Will Continue to Bleed
Branson is looking to raise as much as $504.5 million from the sale of 25 million shares in Virgin Galactic. The move comes at a time when sales have virtually evaporated for major airlines across the world.
A notable exception is the U.S. market. Travel is rebounding there, and local airlines have benefited immensely from the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act as it’s popularly known. The bill aims to address the economic fallout of Covid-19.
For airlines specifically, the CARES Act provided $25 billion in aid to maintain payroll. That’s a massive boost for airlines incorporated in the U.S., and similar legislation does not exist for U.K. carriers. Virgin was hoping for a £500 million bailout, but that hasn’t materialized. Faced with few other options, billionaire Branson was forced to sell a substantial stake in Virgin Galactic. Proceeds will go towards Virgin Group’s “portfolio of global leisure, holiday, and travel businesses” impacted by Covid-19.
Also, we don’t have a definite timeline on when the crisis will end. There’s a chance he could end up selling more shares to make sure Virgin’s airline arm remains afloat.
Where Does SPCE Stock Stand at the Moment?
Virgin Galactic is not burning through cash at a significant rate, considering its line of business. The company has spent $1.4 billion over the past 15 years. On the other hand, operational revenues are virtually nonexistent. In 2019, the company recorded just $3.78 million in revenue from a government contract. At the same time, it spent $133 million to develop a spaceflight system.
Considering the run of play, it will need to tap the equity or bond markets for cash at some point soon. The more significant issue is when the company can deliver a fully functional flight system. That won’t be an easy task.
Competition Ramping Up
Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and Apple (NASDAQ:AAPL) are looking into launching satellite internet on a large scale. Meanwhile, Amazon (NASDAQ:AMZN) founder Jeff Bezos is already in the market with Blue Origin — a company with a very similar focus to Musk’s SpaceX.
Long story short, if tech giants see a market that can be exploited, they will enter the industry in droves. That will dilute the market share of existing players like Virgin Galactic and make it tougher to compete prospectively. As significant as Virgin Group is, it’s no match when it comes to some of the companies mentioned in this section.
Final Word on SPCE Stock
Virgin Galactic is working on projects that once seemed plausible only in movies and sci-fi books. There’s no denying that their business model is incredibly exciting. Whether it’s a safe investment is another story.
Covid-19 has also forced Branson to scramble and save struggling units of the broader Virgin Group. That will command his attention for the foreseeable future until we get a vaccine, and the virus is firmly in our rear-view mirror.
With all of these factors in mind, I can’t recommend anyone buying the stock at this point.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.