Space tourism could be a big industry in the future -- some analysts think it could grow to an estimated $1.5 billion by 2027, and easily get far bigger over the coming decades.
Virgin Galactic Holdings (SPCE +2.19%) is one of the companies vying to carve out its market share in the sector. It's developing spacecraft for taking civilians on suborbital flights. The business is exciting, and a successful spaceflight program could have enormous long-term potential. However, several red flags make Virgin Galactic a risky investment in today's bear market. Here is what investors should know.
NYSE: SPCE
Key Data Points
Virgin Galactic is still in the testing phases
Virgin Galactic made headlines last summer when it successfully conducted a crewed test flight on its flagship spacecraft Unity that included the company's founder, Richard Branson. Virgin Galactic is gearing up for commercial flights, but supply chain problems caused it to push these trips back to next year.
Meanwhile, there is another spacecraft in development, Imagine, which currently has a target-ready date of mid-2023 for commercial use -- but it hasn't yet gone to space, so there is still more testing needed.
A lot of money and work go into preparing these spacecraft for commercial use, and the repeated delays could impact the company's cash burn, a risk in this current market. Meanwhile, rival companies are pushing forward.
Taking on debt could point to trouble
Virgin Galactic had $1.2 billion in cash and short-term investments as of the company's 2022 Q1, likely alleviating any immediate financial needs. However, investors should consider how the company accumulated some of these funds. It took out a loan for just $425 million in early 2022. Debt is rarely ideal for a young and growing company, especially when the business model is not yet operational.
The chart below shows Virgin Galactic's negative free cash flow, meaning the business loses cash. It's burning between $50 million and $90 million per quarter, totaling about $253 million over the past year. Management guided for a cash burn of up to $90 million for 2022 Q2.
SPCE Free Cash Flow data by YCharts
It's easy to do the math and figure out that there's enough cash to last many quarters, but Virgin Galactic presents unique risks that investors should consider. Commercial flights keep getting delayed, which is discouraging because the commercial flights will take time to ramp up -- the company's Unity spacecraft will conduct just one flight per month to start.
The Unity spacecraft holds just eight people, including two pilots, which means that actual paying passengers will number just six per trip. $450,000 per ticket is about $3 million in monthly revenue. In other words, the company is still far from running commercial trips frequently enough to bring in meaningful revenue.
And what happens if there is a problem? Could a technical failure cause months of lost revenue from the resulting testing and repairs? Could the company face pricing pressure if there's trouble stirring up demand at such lofty ticket prices? Virgin Galactic's cash pile needs to be enormous, because it will likely take a while to start turning a profit, and a lot could go wrong along the way.
A harsh environment for raising cash
This makes the current market all the more treacherous for investors. Interest rates are rising to combat inflation, making debt more expensive.
The current bear market has crushed share prices of stocks across Wall Street, and Virgin Galactic is no different, down almost 90% from its peak. It's hard to issue stock to raise money when prices are low because you can't raise a significant amount without dilution -- adding tons of new shares decreases the value of existing shares.
Virgin Galactic will hopefully see its share price recover before it needs to raise money again; debt isn't healthy for a company with hardly any revenue. The company could be in a tricky spot if the stock languishes until more cash is needed.
This dilemma makes the stock riskier for investors. There isn't a clear path to near-term profitability, and the long-term financials of the company are questionable at best. However, patient investors could benefit -- the stock is worth just $1.6 billion today, leaving room for investors to capture long-term upside once the business proves itself a bit more.
