Virgin Galactic Looks Cheap Before Launch of Commercial Service

Virgin Galactic (NYSE:SPCE) won’t launch its commercial revenue-generating service for a year, but it now looks like it will have plenty of cash to survive until then. On Jan. 14, the company raised an additional $425 million in a senior convertible debt offering. This gives it plenty of cash to survive. As a result, SPCE stock looks like it might have reached a trough price.

Virgin Galactic (SPCE) banner hanging on the New York Stock Exchange building to celebrate its IPO.
Source: Christopher Penler / Shutterstock.com

Since my last article on Sep. 8, when I was very negative on the stock, it has fallen from $25.45 down to $10.14 as of the previous close. That represents a drop of $15.31 in just 4 months, or a negative 60% performance. That kind of drop automatically makes me take a look at a stock like this.

As a result, I now think that SPCE stock could actually be a bargain, especially since the company now has additional cash it raised in a convertible note.

Where Things Stand With Virgin Galactic

When I saw that the space tourism company had raised an additional $425 million — and possibly up to $500 million — it made me think that it must be burning through a lot of cash. But, upon further investigation, I found that this is not the case. There are four reasons for this.

First, as of Sep. 30, it still had about $1 billion in cash and securities (actually $977 million) on its balance sheet. This is after the successful Jul. 11, 2021, flight of the VSS Unity in its final private astronaut test flight.

Second, in its cash flow statement from the third quarter, the company revealed it had only burnt through $165.6 million in operating cash flow and just $2.45 million in capex spending. That means that for nine months its total cash burn was just $168 million. This implies just $56 million per quarter in cash burn.

Third, by the end of Q4, the total cash will likely be about $921 million (i.e., $977 – $56 million). And actually, not including $18 million in restricted cash, it would be $903 million. Let’s call it $900 million. But with the additional $500 million in cash that it will close on by Jan. 19 (assuming an additional $75 million is taken up), it now has $1.4 billion on its balance sheet.

Cash Will Be Sufficient Despite Cash Burn

Fourth, this is clearly enough cash to last until Q1 2023 when commercial service is supposed to start, according to page 10 of its Q3 slide presentation. For example, let’s say it actually takes a year and a half, not until Q3, that it can start to book revenue.

That means six quarters of $56 million in cash burn or a total of $336 million. With additional interest expense at 2.5% of $500 million, that will cost $18.75 million, so the total will be $355 million in cash burn. But since it has $1.4 billion now, that will leave over $1.045 billion on its balance sheet. This is more than enough to comfortably fund any cash flow losses after its ramps up commercial service.

Where This Leaves SPCE Stock

The new convertible note has a conversion price of $12.79 per share or just 26.1% over the previous closing price of $10.14. This tells me a lot. For one, the fact that it is able to so easily raise this cash at that price shows me many institutional investors consider it a bargain. They clearly believe SPCE stock will rise over that price well before the Feb. 1, 2027 maturity date, or five years from now.

Secondly, it tells me that Virgin Galactic also believes that $10 per share is too low and that the stock is likely to rise. That’s why they did a convertible note instead of a straight debt debenture. That is because the company will not likely have to pay back the proceeds as the stock will likely rise and all noteholders will eventually convert into equity.

In other words, both sides of the transaction believe that SPCE stock is too cheap here and see it as a bargain. That is a good enough reason to begin accumulating shares now. The fact that it will have plenty of cash to cover burn is also a good second reason.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.

Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.


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