Cheers erupted around the world as billionaire Sir Richard Branson flew to space and back on the Virgin Galactic (NYSE:SPCE) rocket plane. Moreover, the company was awarded a full commercial launch license by the U.S. Federal Aviation Administration back in June. Despite these massive wins, SPCE stock has shed 45% of its value in the last month.
It appears the excitement for space travel is now wearing off as investors turn their attention towards Virgin’s commercial opportunity. Despite nailing its first successful spaceflight in over a decade, the company’s struggles are just about to begin.
SPCE stock has been incredibly volatile for the better part of the year. It touched highs of $62.70 in February and went as low as $14. Many considered the stock to stabilize post its first spaceflight, but the opposite has ensued.
The stock continues its roller-coaster run and is unlikely to stabilize any time soon. Based on the immense number of risks it faces its market capitalization of over $7 billion is unjustified at this stage.
The FAA’s full commercial license effectively allows Virgin Galactic to fly its customers into space. It updates its existing operator license, which authorized its long series of test flights. The new license was the first one that the FAA had ever authorized. A couple of weeks later, though, the FAA had awarded something similar to Blue Origin, led by Amazon (NASDAQ:AMZN) founder Jeff Bezos.
Despite having the license in hand and its founder safe and sound on the ground, Virgin Galactic isn’t ready to commence full-scale space tourism launches. There are still a couple of more test flights that remain to be conducted before starting commercial service in 2022.
Next year is the year where things should pick up for Virgin Galactic. It will work through its pre-bookings of 600 space tickets and analyze the market accordingly. Estimates suggest that there are approximately 20 million-plus millionaires worldwide, of which one-third reside in the United States. Hence, theoretically, these individuals could afford the company’s much talked about $250,000 ticket price.
The Problems With Virgin Galactic
Virgin Galactic has a lofty goal of conducting roughly 400 spaceflights per spaceport each year. However, the reality is that it will fail to do so with its current infrastructure, including a few spaceships and motherships.
Every time it takes off, the combined revenue generated from the flight is around $1.5 million. However, it has to spend $250,000 to $275,000 in replacing its engine. It’s tough to scale its businesses based on its current economics and with the limited pool of customers. Moreover, it would need a massive amount of capital in the coming years to build the infrastructure needed to scale its business effectively.
Furthermore, it could be facing fierce competition in the not-so-distant future. Blue Origin and SpaceX are two companies that are likely to give Virgin a run for its money. Blue Origin recently completed its first successful civilian test flight carrying Bezos and three crewmates.
In a nutshell, it could be a very long time before we see Virgin Galactic turning a profit. This is perhaps why it announced plans to raise $500 million from a stock sale recently. Therefore, if you plan on investing in SPCE stock, you need to be extremely patient about seeing your first profit.
Bottom Line on SPCE Stock
SPCE stock has had quite an eventful few months. However, despite the positive developments, the stock continues to sell off. Investors are understandably skeptical about Virgin Galactic’s long-term prospects at this stage.
Despite the apparent breakthroughs, the company has plenty of work to do before investors can get excited about investing in it at its current levels. It’s best to avoid SPCE stock for now.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.