On Feb. 22, Virgin Galactic (NYSE:SPCE) released its fourth-quarter and full-year 2021 earnings showing it has enough cash to survive. This is possibly a major reason why SPCE stock has not done that badly, despite its still-negative performance, given the market downturn.
For example, as of midday March 2, Virgin Galactic stock was at $9.42 per share, or down 30% year-to-date (YTD) from $13.38 at the end of 2021. However, since I last wrote on SPCE stock on Jan. 18, when it was at $10.14, it has more or less tread water.
Where This Leaves Virgin Galactic
At the time I argued Virgin Galactic was starting to look like it was investable. This was because it had just raised approximately $425 million (and possibly more) cash from a 2.5% coupon convertible note.
The convertible note has a conversion price of $12.79 per share, only about 36% over today’s price. So over the next year or so, it seems very possible Virgin Galactic will be able to eliminate this debt by having it convert into common stock.
However, on Feb. 22, the company indicated it had $931 million at the end of the year prior to the $425 million convertible note. This means that Virgin Galactic has around $1.3 billion or so (before funding costs and cash burn during Q1.)
The other major news is Virgin Galactic’s plan to begin commercial space service “remains on track for Q4 2022.” This is slightly earlier than I expected, as the company seemed to imply it would be Q1 2023 prior to this.
In addition, Virgin Galactic says its fleet enhancement program is on track to be done by Q3 2022. That will put the company in a position to start sending people to space and collecting space tourism revenue. In that regard, the company said as of Feb. 15, it has opened ticket sales to the general public.
The Cash Burn Situation
Virgin Galactic said it had a net loss of $81 million in Q4 and an adjusted EBITDA loss (earnings before interest, taxes, depreciation and amortization) of $65 million.
In terms of cash burn, the Q4 cash flow statement shows operating cash flow was a loss of $65.13 million. On top of this, the company spent $2.18 million on capital expenditures (capex). So the total Q4 cash burn was $67.31 million.
If this continues for the next four quarters in 2022, the full-year cash burn will be $269.2 million. That is significantly lower than the $1.3 billion or so in cash the company has now on its books. In other words, there is a huge cash cushion.
However, as I pointed out in my last article, the interest cash costs from the recent convertible will cost 2.5% annually on $425 million. That adds in another $10.6 million in interest costs, unless the stock rises. If it goes over $12.79, most of the convertible notes will become common stock and the interest costs will go away.
Therefore, to be conservative, let’s just round up and assume cash burn will be $300 million during 2022. That will still leave $1 billion on its balance sheet, plenty of room for the company to build out its fleet and upgrade services. It also provides a margin of safety to finance the beginning of commercial service until it becomes profitable.
Where This Leaves SPCE Stock
Analysts surveyed by Seeking Alpha forecast revenue will reach $5.98 million in 2022 and up to $44.4 million in 2023. In other words, the company is likely to slowly ramp up revenue over the next year starting in Q4 2022.
That is a long time away and a lot can happen. As a result, SPCE stock will possibly be volatile for the next several quarters. This could last until commercial operations begin by Q4 2022. And that date could slip, which would hurt the stock.
So, for the time being, investors might want to take advantage of periods of weakness in the stock. That is where it is now. Keep in mind the market will discount the future at least six to nine months ahead of time. Nevertheless, at today’s price, given the huge cash cushion the company has on its balance sheet, some investors will find SPCE stock a bargain.
On the date of publication, Mark Hake did not hold (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.
