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Why Virgin Galactic Stock Is Falling Today

By Lou Whiteman – Jan 13, 2022 at 10:36AM

Key Points

  • Virgin Galactic is raising additional cash through a convertible debt offering, meaning there could be some dilution for shareholders.
  • The company is attempting to minimize potential dilution through separate transactions, and the debt offering is likely a better way to raise capital than other options.
  • With commercial service still nearly a year away, investors have little reason to get excited about the stock right now.

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The company is raising up to $500 million in a debt offering.

What happened

Shares of Virgin Galactic Holdings (SPCE 1.71%) fell more than 10% at the open on Thursday after the space tourism start-up announced plans to raise up to $500 million in new debt.

So what

Virgin Galactic made history last summer when it launched founder Richard Branson into space, but the news has been mostly bad for investors in the months since. A combination of technical glitches and delayed timelines has caused the stock to lose nearly 75% of its value in the last six months, and Virgin Galactic now does not expect to commence regularly scheduled tourist flights until late 2022 at the earliest.

Virgin's Unity spaceship docked to its companion plane.

Image source: Virgin Galactic.

There's still a lot of work to be done to make the business viable, and that work is going to require investment. On Thursday morning, Virgin Galactic said it intends to raise $425 million from the sale of 2027 convertible senior notes through private offerings, with an additional $75 million in notes expected to be granted to the buyers.

Given that the notes are convertible into shares, there is the potential for the debt offering to eventually dilute existing shareholders. Virgin Galactic is attempting to minimize any potential dilution by entering into deals with financial institutions to account for the potential stock conversion, but those transactions cost money and depending on where the stock is trading when a conversion happens some dilution is still possible.

The proceeds from the offering will be used to fund working capital, including the development of its spacecraft fleet, as well as to offset the cost of trying to minimize dilution.

Now what

No investor likes dilution, but relative to other ways for Virgin Galactic to raise money right now the convertible offering looks like a good choice. It would be difficult for Virgin Galactic to tap equity markets given the way the stock has performed over the past six months, and selling shares guarantees that each existing share would be worth less and would likely cause an even sharper decline.

Thursday's sell-off is rough, but in the long run Virgin Galactic is going to need all the cash it can raise as it attempts to build its business and turn into the growth stock investors had once envisioned. The jury is still out on whether Virgin Galactic will ever be able to establish a market for high-priced space tourism, and profit from the flights, but at least the company now has extra cash in its coffers as it makes its attempt.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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