On Sunday, July 11, Virgin Galactic Holdings (SPCE 3.15%) plans to send its founder, Sir Richard Branson, into space on a test flight onboard the VSS Unity. If successful, Branson would become the first billionaire to go to space -- just days ahead of a planned trip by Amazon's founder Jeff Bezos and his space company Blue Origin.
Share prices of Virgin Galactic temporarily climbed more than 20% in after-hours trading following the July 1 announcement of Branson's trip, with the stock up roughly 166% over the past year.
Branson founded Virgin Galactic in 2004, envisioning a new era of commercial space travel that would advance humanity into outer-space orbits around the Earth and possibly beyond. We are not quite there yet, as the VSS Unity (through its carrier aircraft, the VMS Eve) would only take Branson and his crew to an altitude of 50 miles above sea level at a speed of Mach 3 (3,376 feet per second) -- before returning back to Earth. It is nevertheless a major milestone. Here's why you can count on Virgin Galactic as a frontrunner for making this dream come true.
Crew members of the inaugural flight of the VSS Unity, including Virgin Galactic founder Richard Branson (fourth from the left). Image source: Virgin Galactic.
Conquering the final frontier
Space travel was prohibitively expensive for much of the 20th century, and not just for technological reasons. Back then, government-sponsored space shuttles were put together using millions of parts from thousands of suppliers and contractors. When many companies are involved, each charging markups for components, the overall budget for the assembly can balloon far beyond what is affordable. But Uncle Sam did not seem to mind footing the bill at the time as the country was involved in a geopolitical space race with the Soviet Union -- a race it wanted to win at any cost.
Ironically, it was Russia that ended up finally winning that race. NASA's earliest attempt to launch "civilians" into space was in 1986, but that ended in disaster with the destruction of the space shuttle Challenger. The agency effectively banned civilian access to government space flights shortly after. Since then, there have been only eight tourists in space and all of them have been through the use of a Russian Soyuz rocket and at a cost of as much as $20 million each. Space tourism was an industry still in infancy and still ripe for disruption.
What's so special about Virgin Galactic?
Unlike government agencies, Virgin Galactic manufactures most of its components in-house through its subsidiary, The Spaceship Company, and greatly reduces the profit markups that come with using third-party suppliers. Since its inception, Virgin Galactic has spent about $900 million developing its launch system, which consists of SpaceShipTwo, VSS Unity, and VMS Eve (three vessels), and expanding its fleet. Although not directly comparable, it costs NASA as much as $11 billion to build a space vessel from scratch, with the orbiter (the part that transports the crew to and from space) alone costing $6 billion.
In June, the Federal Aviation Administration certified Virgin Galactic's launch system as space-ready, allowing it to fly its customers to space. Virgin Galactic management anticipates the company will be ready to do so by next year. Michael Colglazier, the company's CEO, projects the program will bring in at least $1 billion per year in annual revenue. That explains why the company has a $10 billion market cap despite no revenue and a cash burn rate of more than $120 million per quarter.
The VSS Unity spacecraft. Image source: Virgin Galactic.
Virgin Galactic designed VSS Unity to carry six paying passengers (and two pilots). The highlight of the experience is a few minutes of microgravity after achieving suborbital altitude. That sounds pretty skeletal, but the company has still seen a significant level of demand from high-net-worth individuals.
So far, Virgin Galactic has sold 600 astronaut tickets and collected over $80 million in deposits. Each ticket costs about $225,000 on average. About 1,000 customers are on a waitlist for the next round of ticket sales.
Is the stock worth it?
The current elevated value of Virgin Galactic's stock suggests it has already priced in some of the launch hype, but there's still more room to run. With continual technological advancements, space tourism will become more and more affordable over the next decade -- creating greater demand. Consider this stock a very long-term investment that could pay off handsomely by the mid-2030s or so. Also, keep in mind that the company's fleet is still tiny at this stage and that there are pitfalls still to navigate for the company. There would be little recourse for investors if a Challenger-type disaster were to happen involving a Virgin Galactic spacecraft.
At the end of the day, the company hopes to revolutionize what many consider a virgin (no pun intended) industry. Booming ticket sales, fleet expansion, and possible integration into other fields (such as commercial space transport) are all catalysts for Virgin Galactic ahead. It is a company with hype potential that is backed by the fundamentals and technology. Hence, it is a solid, if the top, space stock to buy now.
