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Why Virgin Galactic's Delays Are Good News

By Travis Hoium - Mar 2, 2021 at 9:01AM

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Wall Street doesn't like delays, but they may be a good thing for Virgin Galactic long-term.

The market didn't like much of what it saw and heard from Virgin Galactic (SPCE -0.46%) when the company reported 2020's fourth-quarter earnings results. Delayed test flights were a big part of Wall Street's disappointment. The company is putting off its next test flight until May, potentially putting the company six months behind its original plan to visit space in 2020, impacted by a COVID-19 shutdown and failed test flight hampered progress. 

While delays aren't good, the reason behind them should give investors confidence that management's priorities are in the right places. The company is putting safety over speed, and over the long term that should serve it, and its investors, very well. 

Virgin Galactic spacecraft in hanger.

Image source: Virgin Galactic.

Why Virgin Galactic is delaying space flight

Virgin Galactic's test flight in December did not reach space as planned because the onboard rocket motor computer lost connection. After investigating, the company found that electromagnetic interference, or EMI, was the issue. A solution was developed, but that led to another problem that will take more time to resolve. This is how President of Space Missions and Safety Mike Moses put it in a call with investors (transcript via Seeking Alpha): 

EMI is a relatively common challenge in aerospace. And in January, we proceeded with modifications that were designed to lower the EMI levels and better protect certain systems. After confirming through testing that these corrective actions would prevent a reboot of the rocket motor computer, we determined that we were ready to target a February launch. As we completed our pre-flight technical readiness checks for that February flight, some of our shipboard sensor readings showed fluctuations, and it became apparent that those changes that we had made to address EMI had unintentionally created additional noise within our sensor environment. While this noise not in itself is a safety issue, it did let us know that the EMI levels on the ship were impacting areas that while low in profitability could potentially trigger another fail safe scenario, possibly one that could prevent us from seeing a full rocket motor burn. 

We don't know the inner workings of Virgin Galactic's testing and safety checks, but the fact that the company found a solution to December's problem and was still willing to delay February's planned flight because it found another low-risk potential problem is a good sign. 

Virgin Galactic's biggest risk

Why do I appreciate a "failed" test flight and the latest delays? In a word: risk! 

The single biggest risk Virgin Galactic faces as a company is a catastrophic failure during a flight with customers aboard. A single failure could put the company's ongoing viability into question. 

Customers need to have confidence that space flight is safe, and for that to happen Virgin Galactic needs to demonstrate that space flight is safe. This early in the process, anything that undermines confidence is terrible for the long-term viability of the business. 

Putting safety first is good because it reduces Virgin Galactic's risk. 

Long-term thinking

The other element that investors need to think about with Virgin Galactic is the potential upside, including the timeframe of that upside. I think this is a company that can reframe the way we think about space and high-speed travel for the next 100 years. With that long-term view in mind, why would I worry about a two- or three-month delay in a test flight if that delay lowers the biggest downside risk the company faces? 

As a retail investor, your long-term view of a company is the biggest advantage you have over the short-term traders who push the stock higher or lower on any given day. And this is a perfect example of a company that appears to be making the right moves to prioritize safety and lower its biggest risk at the expense of short-term priorities. As a shareholder, I appreciate those priorities being aligned with my own long-term thesis on the company. 

Where does Virgin Galactic go from here? 

As an investor, the delays announced on Thursday do nothing to change a long-term investment thesis in Virgin Galactic. The company still has the opportunity to bring space tourism to the masses all around the world and could become a high-speed luxury travel company with a Mach 3 aircraft in development. These are disruptive technologies that will take decades to develop and mature. 

In fact, after last week's announcement, I feel more confident that management will do what's right short-term to keep staff and customers safe over prioritizing speed to market. 

Looking five to ten years out, the market for space flight hasn't changed, the opportunity to disrupt high-speed travel is still there, and Virgin Galactic is proving to customers that it's putting safety first. There's still risk when developing new technology in a brand new market, but I think the upside outweighs the risk, especially when you take a long-term view of a growth stock like Virgin Galactic. 

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