All of a sudden, Wall Street loves space investing -- as evidenced by the "second annual space summit" that Morgan Stanley just held up in NYC earlier this month. Because of the coronavirus, MS held the conference virtually this year, but even so, it somehow "ran out of room," reports CNBC, because three times as many companies, analysts, and investors tried to attend this year.
Who showed up? Just a few names should give you an idea of the event's popularity: Planet Labs and Rocket Lab, Jeff Bezos's Blue Origin and Luxembourg's SES, Virgin Orbit, and also its publicly traded sister company, Virgin Galactic (SPCE +5.80%).
And that's the one we're going to be talking about today.
Image source: Virgin Galactic.
Participants covered a range of topics at the space conference, in particular discussing the role of special-purpose acquisition companies in bringing space stocks public via reverse-merger IPOs. (They also talked about SpaceX, which has not IPO'ed and, curiously, didn't even bother to attend the conference).
If you ask me, though, the big reveal from this month's summit was Virgin Galactic's laying out its plans to become the biggest pure-play space company in the world that has IPO'ed.
Virgin Galactic's big reveal
Virgin Galactic CEO Michael Colglazier explained that as its test flight program evolves into a commercial space tourism business sometime next year, the company is ramping up its growth plans. From just a single operational VSS Unity spaceplane today, flying out of Spaceport America in New Mexico, Virgin Galactic plans to build entire fleets of spaceplanes and to fly them out of multiple spaceports around the world.
Eventually, Colglazier hopes to be launching spaceplanes 400 times per year per spaceport and bringing in $1 billion annually from each spaceport it flies from.
Space math
Now, the math is a little fuzzy here: 400 flights generating $1 billion in total revenue will require an average ticket price of $416,667 -- 67% higher than the advertised price of $250,000 for Virgin's first 600 passengers.
It's going to be hard to grow the size of Virgin's addressable market (which board chairman Chamath Palihapitiya says he wants to do) if Virgin's first move is to raise its prices. And yet, according to Virgin "chief space officer" George Whitesides, this is in fact the plan -- to raise prices "substantially," reports CNBC.
For that matter, whether or not Virgin Galactic wants to raise prices, it might need to in order to support its expansion plans. You see, factoring in refurbishment time between flights, Virgin anticipates that each of its spaceplanes can fly about 50 times per year. To achieve 400 total flights will therefore require building eight spaceplanes per spaceport -- at a cost of $30 million to $35 million per spaceplane.
After a call with Virgin Galactic $SPCE executives, Jefferies says the second SpaceShipTwo spacecraft is on track to roll out by the end of 2020.
— Michael Sheetz (@thesheetztweetz) September 16, 2020
–Cost to produce more spacecraft targeted $30M-$35M per vehicle
–Each built to last 10+ years and fly 50 flights per year pic.twitter.com/fqB2TFmSyu
(Colglazier, by the way, says it will be at least a few years before it has even five, much less eight, spaceplanes built -- so investors should be prepared to wait awhile for that $1 billion in revenue to materialize).
Additionally, Colglazier has acknowledged that Virgin will need to build "several mother ships" to carry its spaceplanes to altitude. It's not known how much these cost, but the development cost of the first WhiteKnightTwo mother ship, for example, has been estimated at $400 million.
The most important number
And these are just the capital costs Virgin Galactic must absorb. There are also operating costs to consider -- in particular, the cost of replacing the spaceplane engine after each flight.
Yes, you read that right. Every time VSS Unity, or its sister ships, flies, Virgin Galactic needs to replace the spaceplane's hybrid solid-fuel engine entirely. It's therefore perhaps best to think of these things not as ordinary "engines" that can be refueled, such as the ones on a SpaceX Falcon, but as fuel cartridges that, once used, are spent and discarded and must be replaced.
This isn't necessarily a deal breaker for investors considering the stock. Aside from SpaceX, which uses reusable rocket ships, most space companies operate use once-and-discard rockets to reach orbit. But how much will this approach cost Virgin Galactic?
According to the company, at current low rates of production, it costs between $250,000 and $275,000 to build a new spaceplane engine. Management tells me this cost will "come down significantly over time as we scale and enhance efficiencies." But until it does, investors have to assume that engine costs alone will eat up the revenue generated by roughly 1 out of every 6 tickets sold. (Unless, that is, Virgin Galactic raises its ticket prices).
If you're planning to invest in Virgin Galactic stock, therefore, and hope to see it earn a profit one day, I think this is probably the most important number to watch: the cost of the engine.
