On March 10, 2019, a Boeing 737 Max 8 aircraft operated by Ethiopian Airlines crashed after takeoff from Addis Ababa international airport, killing all 157 people on board. This was the second fatal accident involving Boeing's new aircraft, and in the months following the crash, Boeing stock lost 22% of its value -- a sizable loss to be sure, but far from a "wipeout" of Boeing stock.
Now here's a question for you, space investors: Could Virgin Galactic (NYSE:SPCE) survive a similar disaster?
From private to public
Virgin Galactic completed its reverse-merger into NYSE-listed Social Capital Hedosophia Holdings in October, three months after announcing its merger plan. Ever since then, it's been possible for individual investors to directly own a piece of the space economy.
Not everyone's so certain that they want to, however. In the three months since Social Capital became Virgin Galactic, the stock's share price has gone from $11.79 a share all the way down to $7.22 a share. (It's since recovered -- indeed, rising to nearly $13 a share as of Friday's close).
That recovery has been a welcome reward to investors who kept faith with Sir Richard Branson's innovative rocket company. But what was it that spooked investors in the first place? One theory is that, after Virgin Galactic became a public company and began releasing detailed information on its finances, its minimal revenue (just $2.4 million in the first six months of 2019) and heavy losses ($96.4 million) became more apparent -- and a bigger worry for investors.
But there's another worry that may be nagging: The risk of a rocket crash.
In a mostly positive note released last month, analysts at investment bank Morgan Stanley described Virgin Galactic as a "biotech-type" stock. The implication being that if everything goes right, there's no telling how high the company's stock might fly, like a biotech inventing a new wonder-drug.
A successful go at making space tourism a thing could create an entirely new industry, in which Virgin Galactic would be dominant, and make Virgin stock worth $10 a share. (It was trading for $7 and change at the time). And Virgin was also making noises about building on its experience with high-flying aircraft to develop a second industry, in which it would fly air travelers point to point on Earth at hypersonic speeds. Should that idea work out, mused Morgan Stanley, Virgin Galactic stock could be worth more than twice as much -- $22 a share.
On the flip side, however, there was this risk: What would happen to Virgin Galactic stock if one of its early tourism flights crashed? Could the space tourism business survive a series of newspaper headlines blaring: "There were no survivors"?
Some analysts think the answer to that question is a clear: "No." In November Credit Suisse opined that "a catastrophic accident [involving a Virgin Galactic spaceplane] could leave the company valueless." Instead of going to $10, or $22 a share, Virgin Galactic stock could go to $0.
But Wall Street isn't unanimous on the point. Crunching various numbers drawn from the history of spaceflight, equity research firm Vertical Research Partners estimates the likelihood of a relatively new spaceplane like Virgin Galactic's SpaceShipTwo crashing at about 0.5% per flight. On one hand, that's significantly more dangerous than the commercial air industry's record of 0.00002% of airplanes crashing. On the other hand, it's significantly less dangerous than America's space shuttle program, in which approximately 1.5%, of the 135 shuttle flights conducted, ended in disaster.
As Vertical points out, NASA didn't immediately end the space shuttle program despite these losses. Nor did America's astronauts refuse to fly because of the risk.
Granted, Virgin Galactic's customer base won't be made up of professional risk-taking astronauts, but rather well-heeled millionaires and billionaires, able to afford the $250,000 ticket price. Still, even rich folk have been known to take risks from time to time. Vertical points out that "extreme mountain climbers," comprising "highly ambitious and wealthy individuals" for the most part, suffer an attrition rate of about 5% in their attempts to scale Everest and similar peaks. Assuming a similar customer base for Virgin Galactic flights, it's not unreasonable to assume that they might accept a risk 10 times less as the cost of doing business -- and be thankful for it.
Long story short, the risk of a Virgin Galactic crash in the early days of commercial space tourism cannot be ruled out. Indeed, it's close to a certainty. (Vertical even puts a number to the certainty: a 48% chance of at least one fatal crash in Virgin's first 131 flights). When that crash occurs, it's going to scare a lot of investors out of Virgin Galactic stock, and inflict huge losses on any who remain. But assuming Virgin can recover from a disaster, fix whatever caused it, and resume flying, those losses will be very likely be temporary.
No, it won't be pretty. But yes, Virginia, Virgin Galactic stock can survive a rocket crash.