Virgin Galactic has proven its space tourism model. Now, it is laser focused on building a profitable business.
It's pretty hard to argue Virgin Galactic (SPCE -12.54%) is anything but a story stock right now. And you either believe that story or you don't. But there are some pretty compelling elements in the narrative, as well as some really big problems.
Are you a glass-half-full investor or a glass-half-empty investor? Here's what you need to think about as you make the buy, sell, or hold decision on Virgin Galactic stock.
The argument for selling Virgin Galactic stock
The reason to sell Virgin Galactic (or never buy it in the first place) is very straightforward. This space tourism company ended the first quarter of 2024 with cash and marketable securities of roughly $800 million on its balance sheet. That's down from about $910 million at the end of 2023. The $110 million in cash that disappeared went toward Virgin Galactic's capital investment program. The company loses money, and it expects to continue doing so for the foreseeable future, so it's not replenishing the cash it is spending on its operations anytime soon.
Image source: Virgin Galactic.
The current cash balance has to get Virgin Galactic to the point where it has built and is flying its Delta-class spacecraft. That won't happen until 2026 at the earliest. If the company's cash balance doesn't turn out to be enough money, or something goes wrong and delays the launch of the first Delta ships, Virgin Galactic could be in big financial trouble. To make matters worse, it has a $425 million convertible security note that comes due in 2027. So not only would it be in need of more cash if there are development delays with the Delta ship, but there's a substantial debt cliff just beyond the projected 2026 Delta launch date that might be hard to deal with if things don't go as planned.
In many ways, it feels like Virgin Space is walking a financial tightrope. It's the kind of high-risk investment that conservative investors will probably want to avoid.
The argument for buying or holding Virgin Galactic stock
That said, if you can stomach some risk, there are some positives here. First and foremost, the company has proven that it can operate a space tourism business. Although its Unity spacecraft has completed its last scheduled flight, it handled a monthly flight cadence in the early days. That was slowed down to quarterly in an effort to reduce the cash burn, but the real takeaway is that Virgin Galactic can do what it claims.
Meanwhile, the company believes that the Delta spacecraft will be able to cover its flight costs from the sale of a single seat of the six seats that will be available per flight. So it believes that each flight will produce a huge amount of profits. Management thinks that operating just two Delta spacecraft will allow the company to be cash-flow-positive. If that is the case, Virgin Galactic's cash balance won't be plunging anymore. Plus, it will have a more sustainable business to back further capital-raising efforts so it can build even more Delta-class ships.
Another key factor here is that the space specialist has around 725 people lined up to take a flight. These customers have already put money down on what is currently a $600,000 ticket (early buyers didn't pay nearly that much), so they are hugely interested in getting on a Virgin Galactic spaceflight. Even with two spacecraft going at one time (which would be 12 paying passengers), it would take 58 flights to burn through that customer backlog (and that assumes nobody else ever buys a ticket). Tickets aren't currently for sale, but sales will open up again when the Delta ship is further along.
As for the addressable market, well, management believes that there are around 300,000 potential customers in the world. But that assumes that only people looking for "adventure travel" opportunities are going to be interested. That's clearly the case right now, but as more and more successful flights are completed, it seems likely that demand will increase as concerns around risk subside. (A flight disaster would obviously be a major setback.)
All told, Virgin Galactic could be a very profitable business at some point in the future. You just have to believe that everything goes as planned if you step in and buy the stock.
Virgin Galactic stock is definitely not for everyone
After seeing early excitement on Wall Street, Virgin Galactic's stock has trended steadily lower. At this point, it has enacted a 1-for-20 reverse stock split to get back in compliance with exchange listing standards. That's usually not a good sign and is an indication of how bearish investors are right now on the company's prospects. Conservative investors should probably share that view until the Delta-class ship reaches at least a few more development milestones. However, for aggressive investors willing to swing for the fences once in a while, the steep drop in the stock could be an opportunity to get in on the ground floor. If (and it's a sizable if) Virgin Galactic can execute well, it could have an attractive future ahead of it.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
