Space travel firm Virgin Galactic (SPCE) is in the early days of what’s likely to be a major new industry.
However, at the rate it’s going, it may not last long enough to see the space era’s heyday. The company is down in Thursday trading after announcing a major new debt plan, one big enough to choke investors.
This is a deeply concerning development. One sufficiently concerning, in fact, to put me in the neutral camp.
Virgin Galactic’s year in share prices has been a very wild ride. The early part of 2021 saw share prices nearly double in around a month’s time, going from just over $30 on January 14 to just under $60 on February 10. Those gains proved unsustainable, and the company started a fast, then slow, downward slide.
By May 11, the company was making a serious play for $15 per share. That started another explosive leg up. On June 24, the company was once again making a serious play for $60 per share. The company struggled mightily to keep the share price above $50, but with July 8, that hope was lost for the rest of the year.
In fact, that day started a steep drop that’s still going to this day. It has leveled off somewhat, however. The overall trajectory has been down to where Virgin Galactic is struggling to keep out of single-digit pricing.
The latest news will not help. In fact, the latest news has sent the company further down. It was down over 16% in trading Thursday at one point.
The news that made investors revolt featured the company’s plan to issue $500 million in new debt. The company’s reason for increasing its debt load was sound enough, however.
Virgin Galactic is set to use that debt to “…fund working capital, general and administrative matters and capital expenditures to accelerate the development of its spacecraft fleet.”
Wall Street’s Take
Turning to Wall Street, Virgin Galactic has a Hold consensus rating. That’s based on five Buys, two Holds, and three Sells assigned in the past three months. The average Virgin Galactic price target of $29.20 implies 183.2% upside potential.
Analyst price targets range from a low of $15 per share to a high of $50 per share.
A Company on a Coin Flip
Granted, Virgin Galactic’s massive new debt load is being undertaken for all the right reasons. It’s laying out a lot of capital expenditures. It’s buying actual spacecraft. These things take loads of cash.
Here’s the big problem, though. Virgin Galactic’s income statements don’t exactly support half a billion dollars in debt. Looking at the numbers, Virgin Galactic has been a money-losing proposition for some time now.
The third quarter results that came out in November point to a net loss of $48 million, as compared to a $92 million net loss in the same quarter of 2020. It’s managed to slow the pace of its losses, but it’s posting losses nonetheless.
Granted, Virgin Galactic has a solid cash position. The third quarter of 2021 saw cash holdings around the full-billion mark, with $721 million in cash and cash equivalents, as well as $286 million in marketable securities.
However, it’s also worth pointing out that the company generated $500 million by selling 13.7 million shares of common stock back in July 2021. If it raised $500 million just about six months ago, what is it doing going back to the well so soon?
The biggest reason seems to be sheer ambition. The company noted it planned to launch commercial service in the fourth quarter of 2022, with plans to sell tickets at $450,000 each. That’s a pretty solid plan, assuming it can actually sell those tickets.
At that rate, it would take about 1,112 tickets sold to pay back that debt load. Finding a thousand people on Earth who want to see space won’t be hard. Finding that many with half a million bucks to spare might be tougher.
Virgin Galactic could certainly use active cash flow to fund other projects as well. Virgin Galactic’s dividend history is nonexistent, and likely won’t exist for the next few years at least.
Virgin Galactic’s plans are extremely ambitious. So ambitious, in fact, that it’s taking out a massive load of debt to fund those plans more rapidly and meet its end-of-2022 goal.
That investors are revolting against plans to basically mortgage the company to ram its plans through at hyperspace speeds isn’t surprising either.
Basically, Virgin Galactic is taking tomorrow’s revenue today and using that revenue to fund the infrastructure needed to actually realize that revenue. It’s a big risk.
If that revenue doesn’t materialize after the company takes out all that debt, it’s going to have to pay it back out of what profit it does have. That will put investors on the back foot. It’s also why I’m staying neutral on Virgin Galactic. If this works, it will work spectacularly. If it doesn’t, the failure will be just as spectacular.
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