Virgin Galactic: Successful Test Flight Does

Not Mean Share Price Will Take Off

Jun. 07, 2023 4:25 AM ETVirgin Galactic Holdings, Inc. (SPCE)11 Comments1 Like

Summary

 Although Virgin Galactic completed its first successful test flight in 2 years, its
share price has dropped more than 30% from the recent peak which shows
investors' pessimism.

 With more than 800 paid passengers, Virgin Galactic could only realize much of
the revenue with its new spacecraft coming in 2026, due to the limited capacity
and flight cadence of the current version.

 While short-term share price can be expected to rise because of different

catalysts, the long-term share rating is "underweight".
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David McNew

On May 25th, the listed space tourism company in the US, Virgin Galactic (NYSE:SPCE),
completed its first test flight in two years since its last attempt to launch the company's
founder Sir Richard Branson to the boundary of space. This is also claimed to be the final test
flight before their planned commercial mission in late June this year.

While this is supposed to be a huge de-risk milestone that signatures the start of revenue
generating for the company after years of pure cash burn, Virgin Galactic stock dropped more
than 30% from its recent high in the week of the launch. But I agree with the market this time,
a successful test flight does not mean the company's share price is finally taking off.

A recap on Virgin Galactic

Virgin Galactic is the first "commercial space line" that carries passengers to the edge of
space, which is at an altitude of around 50 miles. The sub-orbital spaceflight journey begins
with the custom-built aircraft that carries the spaceships and releasing it at an altitude of 8.5
miles. The spaceship that carries the passengers is equipped with rockets will then take off to
reach the intended heights, before re-entering and gliding back to the ground.
Company Presentation
The whole experience that lasts about 2 hours will allow passengers to experience about 5
minutes of zero gravity and enjoy an overview of the Earth. A ticket for a seat on the
spaceflight costs around $450,000, as per the company's announcement. As of December
2022, there are approximately 800 tickets sold.

What were the bearish cases?

This stock has always been volatile, and the macro market environment has depressed the
share price of small-cap, tech stocks like Virgin Galactic. But what are investors thinking
behind the recent drop?

The long-term view: Revenue build-up shows bearish revenue projection

Since the company has announced in the last earning call that its first-ever commercial flights
will occur as early as late June 2023, we can finally see some top-line numbers. But how
much really? Let's do some math.

In its Financial Year 2022 earnings, it is disclosed that about 800 tickets have been sold, about
600 of which are priced at the range of $200,000 to $250,000 each and the remaining 200 are
sold at $450,000 each, since the ticket sale reopened in 2021 shortly after Richard Branson's
flight. On the other hand, 100 tickets will be reserved for research and science purposes
within the first 1,000 tickets sold.
Company 10K
This, then, gives us a clear picture of what the revenue of the first 1,000 commercial flights
will be. The question now will turn to how much time is needed to realize the revenue?

The current spaceship VSS Unity can take 6 passengers at a time, including 2 co-pilots. This
means that even assuming there will be no tour guide or additional staff, only 4 paid
passengers will be able to be on-board. While the company is targeting a monthly cadence for
the flights, it will be more realistic to expect in 2025.

Company Presentation
On the other hand, the new spaceship Delta that is expected to be tested in 2025 and
commercially operation in 2026, will have more capacity and more frequent flight cadence, as
presented by the company management. With this, it is the best-case scenario that the
company will only start serving the higher paying (i.e., $450,000) passengers starting from
2027, as calculated below:

Company 10K
This reinforces the investment thesis: the unit economic does not work until there is a new,
more efficient, and higher capacity spaceship. And that is dependent on the new Delta class.

The short-term view: The shutdown of another "Virgin" worried investors since the two
companies share some similarities
Before the bankruptcy of Virgin Orbit, an orbital launching provider, the company only had 4
successful orbital launch and was at gross loss for its operations - Virgin Galactic is facing
almost the same situation. In the company's last quarterly filing, it only had a small $392,000
revenue from its paid customers who are members of the Future Astronaut
community. Therefore, to investors who pay sole attention to the financials of companies,
every test launch is a burn of its cash, which is the major reason for Virgin Orbit's demise. In
fact, the recent bankruptcy of Virgin Orbit has an apparent impact on Virgin Galactic, until
the dust settles.
 TradingView
However, despite the operational resemblance, Virgin Galactic is in a far stronger position
cash-wise. In the last quarter, the company has a net positive cashflow of $113 million,
including a $306 million sales of securities to raise cash.

This means if the future ticket sale is excluded, the company's cash burn would have been
about $200 million per quarter, giving the company a year of cash runway assuming a similar
burn rate. This is a good cash position compared with many other tech and space stocks.

Investment risks
Despite the short-term catalysts that might trigger a rally in share price, one must be looking
out for investment risks that will impact the fundamentals on which the short-term bullish
investment thesis is based:

 Final launch date might be delayed: It is not uncommon for orbital launch
providers to delay their planned launch since all technical aspects have to look
alright to make such an attempt, not to mention this is Virgin Galactic's first ever
commercial flight. And this is a major risk event for the company, especially
when they have not announced a confirmed date
 Competitors might take the spotlight: Not long ago, the company's major
competitor Blue Origin has announced to resume its flights soon. While Virgin
Galactic is poised to accomplish a historical achievement, it might not fuel a rally
as much as we think - if other market participants are making even louder noise

 Unexpected launch errors: And the largest risk of all space launch providers is the
failure or error of launch. If you are space stock investor, you will not forget
about the failure of Astra Space and the subsequent 26% drop in share price
Investment Comments: Overweight in the short-term;
Underweight in the medium-term
In the short term, there are several positive factors that contribute to a slightly bullish outlook:
Firstly, the recent bounce-back in stock price at $3.20 indicates strong price support.
Additionally, the pivot in Fed policy has fuelled a rally in tech stocks, which can potentially
benefit the company. Moreover, the upcoming first-ever commercial launch of the company is
an optimistic catalyst that may trigger a rally in the stock.

However, when considering the company's revenue projection and technology development, I
maintain an underweight view. The numbers don't seem to add up for at least the next 3 to 4
years, as discussed in the article.