When Virgin Galactic (SPCE +2.20%) reported its year-end 2021 financial results last week, the news was ... well, better than expected at least. (Although to be frank, expectations weren't very high.)
After it spent more than four months not launching a single spaceflight, analysts had forecast Virgin would end the year with losses of $1.54 per share on total revenue of about $3.3 million. As it turned out, losses were only $1.43 per share, though, while the sales estimate was right on target.
And granted, even losses of "only" $1.43 seem pretty bad for a stock valued at under $10 a share. Regardless, investors bid up Virgin Galactic stock sharply -- 17% through the end of last week.
Image source: Getty Images.
Bad news and good news
Was this price spike justified? Not on the basis of profits, certainly -- or even of sales. According to data from S&P Global Market Intelligence, Virgin Galactic's sales in 2021 were actually $500,000 less than it collected in 2019!
Rather, it seems investors were encouraged by Virgin Galactic's assessment that, despite the anemic performance in 2021, the company is now:
- "[O]n track and on schedule to complete our enhancement program and [then] launch commercial service" in "Q4 2022."
- Saying that consumer "demand for our one-of-a-kind experience remains strong."
- And saying that with the rollout of "Spaceship III," the VSS Imagine, Virgin Galactic now has two working spaceplanes with which to carry space tourists to the edge of space and back.
In its release, Virgin Galactic noted that it is now selling tickets for spaceplane rides at $450,000 a pop. Management also advised that "around 1,000 people" have put down at least "a de minimis deposit" toward the full price of those tickets.
1,000 tickets times $450,000 sounds like a lot of money. It's not quite as much as it sounds, however, as Virgin Galactic's first 600 tickets were reportedly sold for closer to $250,000 (or less). More importantly, even $450,000 a ticket might not be enough money to let Virgin Galactic turn a profit anytime soon.
Space math
Consider: As Ars Technica's Eric Berger pointed out last week, "Virgin Galactic's expenses are ~$80 million a quarter. At $450k a seat [Virgin Galactic needs] 30 full flights a quarter" just to break even on its business.
More simple math: Virgin Galactic's expenses are ~$80 million a quarter. At $450k a seat, that's 30 full flights a quarter, or one flight every three days. TO BREAK EVEN. And first they've got to fly hundreds of people who have already paid for their tickets.
-- Eric Berger (@SciGuySpace) February 22, 2022
But the problem is actually even worse than that, because the more frequently Virgin Galactic flies, the more its "expenses" will grow.
And not the least of these expenses is the engine on the spaceplane itself.
Virgin Galactic has previously disclosed that its spaceplanes use expendable hybrid solid-fuel engines that must be replaced after each flight. Switching out old for new engines adds at least $250,000 to Virgin Galactic's operating costs per flight. So investors must expect that flying "30 full flights a quarter" is going to add at least $7.5 million to Virgin Galactic's quarterly operating costs.
Result: Virgin Galactic now must fly at least 33 times per quarter to cover those extra costs and break even.
But is that even realistic?
NYSE: SPCE
Key Data Points
As CFO Douglas Ahrens explained in the company's conference call, Virgin Galactic believes that it will be able to fly its Unity spaceplane once per month, and its Imagine spaceplane twice per month. That adds up to three flights per month, or nine flights per quarter -- not 33 -- and no sooner than first-quarter 2023, when Imagine is expected to begin flying.
Only the addition of the company's new planned "Delta" class spaceplanes to the fleet, "which we expect to be able to fly on 1-week intervals," has the potential to move Virgin Galactic toward the flight cadence it seeks. And even then, that won't happen until the company has at least three Delta-class spaceplanes in service (which would permit 39 flights per quarter in an ideal situation -- or a bit more if Unity and Imagine also remain in service).
Given that Delta isn't expected to begin flying before "late 2025," this makes it essentially impossible for Virgin Galactic to even begin breaking even before 2026 at the earliest.
The most important point for investors
Final point: Virgin Galactic forecasts that Q1 2022 cash burn will be in the $75 million to $85 million range. Annualized, that works out to about $320 million, which is ahead of the $220 million to $230 million in cash burned annually over the past three years.
Assuming this is the new normal for Virgin Galactic as it ramps spaceplane production and flight operations, the $1.3 billion in cash that Virgin Galactic now has on hand should be enough to last the company four years, until it achieves the "positive free cash flow" that it is "aiming for ... by 2026." It's going to be awfully close, though, and I wouldn't rule out the chance the company decides it needs to raise prices again to ensure it remains solvent.
Failing that, chances are good Virgin Galactic will be forced to raise more cash, issue more shares, and dilute its shareholders at least one more time before 2026 arrives.
