Being a space tourism company still in its infancy, Virgin Galactic (SPCE 2.90%) stock was as hard hit as any other tourism operation when the coronavirus pandemic swept the globe. And like many other tourism operations, the company has managed to recover somewhat from the downturn, but its stock is still trading well below highs hit before the late February market meltdown.
In a hopeful sign for Virgin Galactic, plans are nearing completion to carry out its final test flights and potentially open its commercial service to the public.
Now that the ship(s) may soon take off, will this commercial spaceline operator go boom or bust?
Last tests before liftoff
Virgin Galactic engineers plan to complete testing of the company's SpaceShipTwo system on Oct. 22. If successful, this test would mark a major transition for the spaceliner vehicle the company is basing its operations on. The vertically integrated company has spent the last two years preparing for the day it can send up founder Sir Richard Branson, and these next two suborbital flight tests will prove whether its efforts to start its commercial service are on course.
Image source: Virgin Galactic.
Virgin Galactic has invested more than $500 million into its mission, with the aim to be the first in commercial space tourism. Like many start-ups, the company has spent far more than it could possibly earn back in the immediate future. In Virgin Galactic's case, the cash burn has been even higher: It turns out developing for space is a very, very expensive business, and without a product, the company has fallen deeper in the red with every quarter that passes.
However, its last successful flight in February 2019 generated a buzz of interest, which translated to over 600 spaceflight tickets being reserved and more than $80 million placed as deposits. All told, since its very first test flight in December 2018, Virgin Galactic has received nearly 8,000 interest inquiries on the back of very passive marketing efforts.
Demand estimates remain high
Of course, assuming that Virgin Galactic successfully passes these next test flights, the company's founder will likely be the first Future Astronaut -- the descriptor being used by Virgin Galactic for its space fliers. This would mark the start of the company's commercial service, which includes a three-day pre-flight preparation tour in the Virgin Galactic Spaceport and a 2.5-hour suborbital flight through space.
Yet, with so many expenses involved in developing, testing, and maintaining a spaceflight operation, will Virgin Galactic ever be able to turn a profit?
In fact, nearly all of the company's stock value derives from high consumer expectations. At the moment, Virgin Galactic has negligible revenue in proportion to its expenses. The company logged $230,000 in revenue in the first six months of 2020, down from $2.4 million in the prior-year period, while operating expenses jumped 40% year over year.
But a recent Cowen survey has found that a significant number of individuals with more than $5 million in net worth are very interested in commercial spaceflight and are willing to pay $250,000 for a single ticket. Virgin Galactic has also confirmed that its near-term customers will be mostly individuals with a net worth of over $10 million.
Image source: Virgin Galactic.
Only 575 astronauts worldwide have made it out of Earth's atmosphere to date, and the appeal of such a trip remains extremely elevated. Beyond that, the U.S. Chamber of Commerce estimated that, while the commercial space industry was worth $385 billion in 2017, by 2040 that figure may very well balloon to $1.4 trillion.
So the monetization potential is definitely present, and the company has the ability to eventually fly humans to space in the near future. The question of profitability, though, is one for the long run. Virgin Galactic will launch commercial service with only one ship and one carrier aircraft, and consequently, the flight rate will be highly constrained. This may result in initial ticket prices higher than $250,000 per person, which is somewhat to the company's benefit as it would ramp up revenue in relation to costs, but it also limits the company's ability to expand operations. After all, only six passengers fit inside the VSS Unity spaceship, and launches are highly subject to weather conditions and equipment readiness.
To address this, Virgin Galactic is already preparing to manufacture two additional spaceflight systems. This fleet expansion would then allow an increase in the annual flight rate and help the company to solidify its status as the first and possibly premier space tourism operator in the world.
In terms of profitability, however, these upcoming flights will serve as a turning point if successful. The faster Virgin Galactic manages to put people up in space, the faster it may one day meet consumer expectation for its decidedly cool product.
