Virgin Galactic (NYSE:SPCE) stock has fallen back to Earth.
A few weeks ago, it appeared that Virgin Galactic was launching again; shares had advanced from $16 to $25 and seemed to set to challenge the highs from this spring. That rally fizzled, however, on news that the company was doing a massive capital raise. Now the stock has slipped back to $18.
And sure, I know no one likes share dilution. Virgin Galactic hit investors with a rather large offering, and it’s understandable why the stock has slumped. However, in this case, investors are reacting too negatively.
The truth is the company needed money as it advances toward commercial flights and now it has it. This is a big step forward for the company’s long-term vision, even if it’s painful in the short term.
Virgin Galactic’s Financial Situation
On Aug. 10, Virgin Galactic announced that it had successfully closed its proposed public stock offering. The company sold 23.6 million shares of SPCE stock for $19.50 a pop. As a result, the company will obtain nearly $460 million in proceeds.
As of June 30, Virgin Galactic had $360 million in cash and a smattering of other current assets as well. So, you might ask, why the rush to raise money? Since the company’s founding, Virgin Galactic has lost $240 million over the course of operations. However, it has sharply ramped up expenses over the past six months as it moves toward commercial operations.
Last quarter alone, Virgin Galactic recorded an operating loss of $63 million. Its research and development budget of $37 million for the second quarter accounted for the majority of expenses. At a pace of $60 million in operating losses a quarter, Virgin Galactic would only have had cash to make it through the end of 2021, give or take a few months.
That could have been cutting it close. The company plans to fly Richard Branson in a demonstration voyage next year, followed by the launch of commercial service thereafter. However, any slips in the timeline could have pushed revenues into 2022 and left the company with a cash shortfall.
Now, with $800 million in cash on hand following the secondary, Virgin Galactic should be self-funding until 2023 even if revenues take longer to start up than expected.
Virgin Galactic Is Now a Serious Company
At the time of Virgin Galactic’s trading debut earlier this year, many analysts mocked the company. Virgin Galactic had an unknown business model, no revenues, and not much scientific proof that its space vehicles are safe or economically justifiable.
The fact that the company came public via the often-dodgy special purpose acquisition vehicle (SPAC) route only added to the doubts. Why couldn’t a Richard Branson-backed company find investment banks willing to underwrite a traditional initial public offering?
That skepticism was all logical. However, to Virgin Galactic’s credit, it has now solved for several of these concerns.
The balance sheet is no longer a major flaw. With the more than $400 million that it just pulled in, Virgin Galactic has plenty of capital for mounting a credible research & development effort. There’s no guarantee that Virgin Galactic can outcompete the likes of SpaceX but it’s now deservedly in the same conversation.
Further to that, Virgin Galactic also brought in a top-notch chief executive officer. Previous CEO George Whitesides was a reasonable leader but didn’t have much in the way of compelling private company experience. The company’s new leader, however, is Michael Colglazier.
Colglazier worked for Disney (NYSE:DIS) for 30 years, and last headed their international parks division. That was a plum post, and his willingness to give it up and take over the reins at unproven Virgin Galactic is a strong vote of confidence.
SPCE Stock Verdict
There are two sides to Virgin Galactic’s recent stock offering. On the one hand, yes, it was a huge slug of dilution. In offering that much stock, Virgin Galactic heavily watered-down existing shareholders. That, in turn, is going to keep a ceiling on Virgin Galactic’s stock price in coming months. It will take a while for the market to digest such a big block of new stock.
On the other hand, the funding issue is gone. That was a major risk factor and now it’s dealt with.
Admittedly, this isn’t a stock I have much interest in buying. At this point, SPCE stock looks more like a venture capital play than a normal public company. It’s simply too early along in the business model to reliably determine whether or not this is going to be a winner.
Does the technology work flawlessly, and will there be sufficient commercial demand if it does? We’re just speculating at this point.
However, if you were on the fence about owning Virgin Galactic before, this capital raise might tip the scales in favor of a buy. With the company now cashed up for years, the risk of near-term hiccups is greatly reduced. The team now has enough cash to focus on building the company for the long haul.
Virgin Galactic is a promising long-term story. I have no idea if it will pan out, but with the balance sheet now looking good, it’s not a bad speculative bet.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.