Virgin Galactic (NYSE:SPCE) stock soared by around 50% in the past three trading days, as investors enthusiastically welcomed the space tourism company’s updated commercial launch targets, now anticipated to occur later in June. However, investors may quickly realize that Virgin’s newly-set targets were only a way for the company to revitalize interest in the stock without offering any new data to gauge the forthcoming commercial flights’ impact on the company’s financials.
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In essence, there seems to be no genuine novelty here. The expectation that Virgin’s commercial flights would eventually commence was already known. Consequently, this development fails to alter the bearish outlook for the stock, as Virgin Galactic continues to be a cash-consuming entity that steadily erodes shareholder value quarter after quarter. Hence, I remain bearish on the stock.
There is No Business Model Here
Virgin Galactic makes for one of my most compelling bearish cases in the market due to its conspicuous absence of a viable business model, rendering it remarkably straightforward to position a bet against the stock.
Of course, the company argues that its value proposition lies in providing customers with an otherworldly experience: a spaceflight offering breathtaking views of Earth and fleeting moments of weightlessness. To substantiate the feasibility of such flights, founder Sir Richard Branson and his team embarked on a successful journey to the edge of space aboard the VSS Unity in June 2021.
Nevertheless, the triumph of this single flight does not signify the scalability of the firm’s operations or the ability to amass a sufficient customer base willing to pay the hefty $450,000 ticket for the sake of claiming a “space” voyage.
In fact, since Richard Branson’s demonstration, Virgin Galactic has incurred hundreds of millions of dollars in losses, deferred the launch of a second suborbital spacecraft, and has made little to no progress when it comes to selling tickets. In fact, Virgin Galactic has only sold about 800 tickets, including the initial 600-700 reservations secured in 2021.
Importantly, these tickets were sold at just $200,000 each. This renders them an inadequate reflection of the genuine market demand for tickets which are now priced at double the amount paid by the initial consumers.
Consequently, we lack any reliable data to gauge SPCE’s cash flow under normal operational conditions. Even the company’s recent update on its commercial flight schedule fails to address this issue, as it omits crucial figures regarding flight frequency and alternative revenue sources.
A basic estimation, however, reveals the glaring nonexistence of Virgin Galactic’s purported “business model.” For instance, if the company were to maintain its initial plan of three flights per month, accommodating six passengers per flight, as demonstrated by Richard Branson, it would take slightly over three and a half years to fulfill existing reservations before recording any additional revenue.
Yet, even then, the company would be unable to generate sufficient cash flow to cover its escalating losses, which have reached alarming levels. In its most recent Q1-2023 results, Virgin Galactic reported its largest net loss to date, amounting to approximately $159 million—significantly surpassing the $93.1 million net loss incurred in the third quarter of 2022. Sadly, Virgin Galactic has accumulated losses exceeding $566 million in the past year alone, with losses continuing to widen quarter after quarter.
To highlight the sheer incredulity of Virgin Galactic’s break-even scenario, the company would have to attract an astounding annual count of approximately 1,260 individuals, each willing to pay a staggering $450,000. This would merely offset their losses, let alone pave the way for a substantial profit – and this calculation assumes that the company’s losses remain stagnant, a prospect that seems unlikely considering that they have constantly been widening.
Continuous Losses to Drive Shares Lower
As previously mentioned, Virgin Galactic’s investors may eventually realize that the company’s ever-accumulating losses will almost certainly keep driving shares lower from here. To quantify this issue, at its current rate of losses, Virgin Galactic is left with no more than a year and a half before its financial resources dwindle to nothing.
This is because the company has just $874 million in cash, cash equivalents, and marketable securities left. In order to stay in business, the company will (as it has constantly done) resort to the issuance of additional debt and/or equity, effectively placing the burden on existing shareholders.
This concern seems to be of little consequence to management, as Virgin Galactic’s share count has surged by a staggering 45% since its initial public offering. The company is essentially flooding the market with new shares and taking on debt to stay afloat.
Given the absence of any immediate catalyst to generate revenues, this strategy is expected to persist “indefinitely.” In essence, shareholders are facing the risk of being substantially diluted, leaving them vulnerable to further share losses and reverse stock splits without any safety net to shield them.
Is SPCE Stock a Buy, According to Analysts?
Turning to Wall Street, Virgin Galactic has a Moderate Sell consensus rating based on one Buy, two Holds, and four Sells assigned in the past three months. At $3.81, the average Virgin Galactic stock price target implies 36.6% downside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SPCE stock, the most accurate analyst covering the stock (on a one-year timeframe) is Ronald Epstein from Bank of America Securities, with an average return of 50.6% per rating and an 87% success rate.
Final Thoughts
Virgin Galactic’s recent stock rally based on updated commercial launch targets may just be short-lived hype. The company’s lack of a viable business model and its continuous losses raise significant concerns for investors. Further, the absence of concrete data on customer demand and revenue sources compounds the bearish outlook.
With mounting losses and a limited timeframe before financial resources run dry, Virgin Galactic’s reliance on debt and equity issuance puts existing shareholders at risk of substantial dilution. Hence, you may want to continue to avoid the stock, despite its recent, seemingly-exciting news.
