Virgin Galactic (NYSE:SPCE) might look like a good buying opportunity given its recent drop, but it isn’t. SPCE stock is likely to fall further over the next year as the company is almost certainly going to have to raise more cash, given its current cash burn situation.
Sorry if that pops some balloons for day traders who think this is a good time to buy in. The truth is that fundamentals like the dire state of the company’s cash flow statement always win out in the long run.
Cash Burn and Cash Raise
Here’s the situation: Virgin Galactic is a massive cash-burning company. In the fourth quarter, the company made negative $70.096 million in cash flow from operations. In addition, its capex spending was $3.54 million and debt payments totaled $0.31 million. That means its cash burn for the quarter was $73.95 million.
All of this can be seen in the company’s “Condensed Consolidated Statement of Cash Flows.” This is about halfway through Virgin Galactic’s Feb. 25, 2021, earnings release for 2020.
If this continues each quarter, which is highly likely, the annual cash burn will be $295.8 million, or about $300 million per year. The problem is Virgin Galactic has just $665.9 million in cash, as of Dec. 31. Therefore it has just a little over 2 years of cash burn ($666 mil / $296 mil = 2.25 years).
But, here is the issue with that: you can’t wait until the company runs out of cash to raise more cash. In fact, even if you wait another year, the market is going to price in dilution from another cash raise.
All of a sudden, you have an unvirtuous circle. SPCE stock will fall because there will be further dilution. But the further it falls, the higher the dilution needed to raise more cash. And that leads to a further drop.
The only way to avoid this is to raise cash before the market suspects it will happen, or, conversely, when you have plenty of cash. CFO’s know this very well. The best time to raise cash is when you don’t need it.
By the way, even a debt raise will have the same effect, since the company is not producing revenue. The only way to pay off the debt will be with a dilutive equity raise.
Where This Leaves SPCE Stock
Virgin Galactic recently postponed its Q1 earnings release date to May 10 in order to adjust its accounting based on the SEC’s rules for warrants. I consider that issue much less important than how fast the company is burning through its capital.
So look at the cash flow statement in its upcoming earnings release. If the company is still burning through anywhere near $73 million in Q1, watch out. Analysts will start catching on. They know that the company still has not stated when it will start commercial operations.
It has already pushed out its space tourism plans to 2022, but no definite date has yet been set. Moreover, its latest flight ended with a failure. The fact remains that this space company has not had one earth orbit with any of its vehicles.
Here is what I predict. After the Q1 earnings, SPCE stock might have a short pump up based on the company’s statements and hype about its future. But sometime between now and the end of the year, analysts will start focusing on another capital raise. In fact, they will likely alert their own investment banking divisions that now would be a good time to approach SPCE.
If Virgin Galactic can raise 500 million above $20, or about a $5.2 billion market capitalization, dilution will be less than 10%. But watch out if it falls to $15, or 26% below today. Then the market cap will be just $3.8 billion. SPCE stock will be at the unvirtuous cycle I mentioned above.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
