The market ripping higher over the last year has made a lot of growth stocks look expensive by traditional valuation metrics. But if we look at some of these highly valued companies more like early stage companies that need to invest money in growth projects, that perspective can change.
With that lens, selling stock to raise capital can actually pull growth forward and allow a company to invest more quickly at a larger scale, adding value long-term. Three companies that I think should take advantage of this market to raise significant capital are Virgin Galactic (SPCE 20.69%), SunPower (SPWR -8.41%), and Nikola (NKLA 1.98%).
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Rocket fuel for Virgin Galactic
Virgin Galactic is still effectively a pre-revenue company, and has yet to launch its commercial space flights into orbit. But it has big plans to expand its fleet of spacecraft and the locations it can fly from over the next decade, so why not pull that development forward?
Right now, Virgin Galactic has one spacecraft built, the VSS Unity. But it plans to have four more by 2023, bringing the fleet to five total spacecraft. Additional funding could help push that timeline forward, and in doing so increase the amount of revenue the company generates each year.
There's also only one place in the world that Virgin Galactic is planning flights from -- in New Mexico -- which limits its opportunity. In a recent presentation to investors, CEO Michael Colglazier said that he sees $1 billion of revenue potential from each spaceport. So the company could grow significantly by adding more spaceports to the portfolio. Funding from a stock sale could be key to making that expansion a reality.
Adding spacecraft and spaceports would be a matter of scaling Virgin Galactic's core business. But the bigger impact could be investing heavily in the Mach 3 aircraft concept Virgin Galactic announced last year. Mach 3 aircraft are intended for high-speed, luxury travel, and could ultimately generate billions in revenue if the concept is successful. Having the funds to invest in this growth opportunity could be a big growth driver for Virgin Galactic.
More money would mean more for Virgin Galactic to invest, and that could really be a boon to the company long-term.
Continuing the transformation of SunPower
For years, SunPower's challenge has been turning industry-leading solar panels into a profitable solar development business, which has hindered the stock. In 2020 the company shed its manufacturing business, and is now focused on an asset-light model of providing hardware and services primarily to third-party installers. The aim is for this strategic change to enable higher margins and better profitability long-term. But historically, SunPower has had trouble generating a consistent profit because of limited growth and a high debt load.
SPWR Revenue (TTM) data by YCharts
If SunPower sold shares at today's elevated stock price, it could clean up the balance sheet, which currently has $649.5 million of debt (after a recent tender of $238.9 million of debt due in 2021). That would allow the company to retain the 3.5 million shares of Enphase Energy, its solar microinverter partner and a valuable equity stake to hold long-term.
From a growth standpoint, adding cash to the balance sheet would allow SunPower to spend more money on its transition to being an energy management and battery storage company. The company is still relatively new in the residential energy storage business, and expanding its capabilities and developing a market-leading position in that area could be transformational for the company. I think selling enough stock to fund these growth initiatives and give plenty of room for a potential downturn in the market would be a wise move given where shares are today and the growth opportunities ahead in solar and energy management.
Giving Nikola runway to develop
Another very pre-revenue company is Nikola, which can't seem to decide what it wants to be. The company hit public markets on the promise that it would build a battery and hydrogen-powered pickup truck, only to see that fall through when a manufacturing agreement with General Motors (GM 5.25%) didn't work out. Now the company is back to focusing on hydrogen-powered semi-trucks, which was its original business model.
On December 31, 2020, the company had $840.9 million in cash, but it burned $181.7 million last year and that cash burn could increase as it develops its truck and builds out manufacturing. With a $7.2 billion market cap as of this writing, the company could raise hundreds of millions in additional cash, funding not only its hydrogen semi-truck plans but other growth initiatives -- including potentially bringing the Badger pickup back into the pipeline.
The biggest challenge for a company like Nikola will be getting to a point where it's cash-flow positive and fully sustainable on its own. With the high valuation the market has given this growth stock, it can raise cash to increase its flexibility in the future. As a pre-revenue company, there's never too much cash on the balance sheet.
Take the money and run
Each of these companies has aspirations to remain a growth business for decades to come. And they could use their current stock valuations to help fund that growth. They could develop technologies faster, build manufacturing more quickly at larger scale, and ultimately mature much more quickly with more cash.
Usually, stock sales are seen as a point of weakness by public companies, but in this case I think selling stock could be a sign they're willing to invest big in the future. They might as well strike while the market is hot.
