Shares of space tourism company Virgin Galactic (NYSE: SPCE) are up 16% since reporting its weaker-than-expected third-quarter results. It appears that earnings don’t matter at this stage, as investors are banking on its billion-dollar potential. With a series of test flights, the company is slowly progressing towards receiving FAA approval to kickstart its space tourism plans. Once the company completes its preparatory test flights, expect SPCE stock to blast off to record levels.
The management expects that the first test spaceflight to take-off between Nov. 19 and 23. The goal is to complete all the data requirements for verification and validation. Virgin Galactic feels that, given the current circumstances, commercial operations will be pushed back into 2021. Investment bank Cowen Inc. believes that commercial spaceflights could begin in the second quarter of 2021, with Virgin Galactic ending up with $12.4 million in revenue. It is crucial though that there are no more Covid 19 related delays, which could seriously hurt investor sentiment. For now, though, investors are buying the hype, and the onus is now on the company to speed up proceedings.
A Torrid Third Quarter, But Who Cares?
It’s rare to see the market looking past a company’s dismal quarterly results. However, Virgin Galactic is in a unique position where investors squarely focused on the long term. Results for the third quarter lagged behind analyst estimates. The company reported a loss of 34 cents per share, with zero sales. On the flip side, analysts were expecting a 27-cent loss per share with $1 million in sales. Additionally, cash equivalents increased handsomely to $742 million, up from $360 million in the previous quarter.
The management remains undeterred, pointing towards an “annual $1 billion revenue opportunity per Spaceport“. The company had previously never floated the idea, but analysts believe that it will generate roughly $550 million in sales by 2025.
Still, several developments were noteworthy during the quarter. The management states that the company has built a sizeable backlog and progressing towards launching its commercial operations. CEO Michael Colglazier states that “During the quarter we made good progress completing the final steps to prepare for [our spacecraft’s] first rocket-powered test flight from Spaceport America this November.” Meaningful progress has been made on the company’s SpaceShipTwo vehicle, which should be unveiled in early 2021. Initial commercial flights will take-off from the company’s spaceport in New Mexico, later expanding to other parts in the US and other countries.
Furthermore, the company also plans to retire the “One Small Step” program after this year. Roughly 900 people were part of the program, putting in their $1,000 as a deposit for future tickets.
Path to Profitability
One of the main concerns for investors with regards to Virgin Galactic is its path to profitability. Operational and research and development costs are sizeable, and the construction cost per spaceplane is enough to make anyone’s head spin. However, if we break it down, it seems that Virgin Galactic could have this under control.
Construction costs per plane are estimated at $30-$35 million and can carry six passengers at a time. Each plane can fly 50 times per year, and each ticket costs $250,000. Therefore, we are looking at $1.5 million in revenue per flight and $75 million for a year. Hence, the company should comfortably cover the construction costs of the plane along with overheads. After about 20 flights, it would have enough funds to finance the development of another plane.
Under the “One Small Step” program, it has 900 signups, which means that it is looking at a total revenue of $225 million. Moreover, the market opportunity is growing, with the increase in high net worth individuals worldwide.
Final Word on SPCE Stock
Virgin Galactic is in a distinct position where its investors are looking past its financials. However, it needs to deliver on its promises and ensure no further delays in its commercial operations’ commencement. The billion-dollar figure per spaceport mentioned by the management should entice new and existing investors. Moreover, its path to profitability looks solid so far and points to a sustainable operation. Therefore, SPCE stock is still a buy despite its recent shortcomings.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article