I wrote critically about Virgin Galactic (NYSE:SPCE) on April 14 when it was at $19.03 per share. My article struck right at the main problem for SPCE stock — nothing will help the company stop losing money. Since then, shares have fallen below $17.
And I believe SPCE stock will keep falling. Investors will soon realize that the company has limited prospects for really making money.
In fact, Richard Branson probably recently came to the same conclusion. His company, Virgin Group, just sold its controlling stake in SPCE stock for $445 million. That is not a very good sign of confidence in the company. Why should investors stick around after he did that?
It’s All About the Cash Burn
Let’s get the big news out of the way first. SPCE stock is up over 12% in intraday trading Monday on what some investors see as astronomical news. Virgin Galactic will start to coordinate private astronaut trips to the International Space Station, thanks to a partnership with NASA. According to CEO George Whitesides, potential clients include researchers and government officials.
But is this news a sign that all is right for Virgin Galactic? No. It’s impossible to analyze this sort of announcement. Plus, the company isn’t completely abandoning its existing business model, which takes us right back to its cash burn problems.
When Virgin Galactic went public this fall, it picked up about $419 million through a reverse merger procedure. This was with a special purpose acquisition company. Barron’s Nicholas Jasinski wrote an article recently about why SPACs are increasingly popular.
However, the problem is that the company burnt through a lot of that cash. In the first quarter, the prospectus shows that the company had operating cash flow losses of $56 million and capital expenditure spending of $4 million.
So it is burning $60 million a quarter. By the end of the next year, the cash pile will have dropped to $179 million, or 43% of the existing cash level.
So, unless the company can launch its money-producing operations over the next year, SPCE stock is likely to drop. For example, the investors in the stock will be worried that another round of capital will dilute their shareholdings.
The Good News: Suborbital Flights Could Begin Soon
Over 700 people have put down $250,000 to fly in Virgin Galactic’s VSS Unity SpaceShipTwo rocket plane. That plane has flown over 50 miles high twice.
If operations are allowed by next year, then the company could start booking its reservations as income earned. Moreover, at that point, it is likely that interest worldwide in booking new reservations with the company would pick up.
But something still does not add up to me. If the company’s break-even cash flow number is $60 million per quarter, it will need over 240 people every quarter. In other words, 240 people paying $250,000 every quarter will only keep the company’s cash flow at break-even levels.
I suspect there aren’t that many people willing to pay that much every quarter. Even if the company somehow got the cost down to $100,000 for a trip, there still aren’t enough rich people to keep this company profitable.
But here is the thing. If you read through the prospectus, there is no discussion of the “prospects” of the company’s future earnings and cash flow. How is an analyst supposed to build out its business model without any guidance from the company?
What Should You Do With SPCE Stock?
Some of the more interesting analyses of Virgin Galactic stock come from YouTube. For example, this analyst does a good job of keep people updated on SPCE stock.
But so far I have not been able to figure out the company’s business model. Therefore, I can’t put a price target on it. I also have not found any analyst who has been able to figure out the model. If you know of one, let me know.
Therefore, I suspect you should stay away from SPCE stock. Wait until it becomes much clearer on how the company will sustainably make cash flow profits.
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.
