The stock market tends to be rational over longer periods of time, but can be shockingly irrational over short periods. That's the big-picture story behind Virgin Galactic (SPCE 3.25%). It's worth looking at the numbers behind this stock's meteoric rise and subsequent crash landing to get an idea of just how important it is to control your own emotions even when those around you are euphoric. Paying attention to the boring old financials can help.
A wild ride since going public
Virgin Galactic didn't enter the public markets the normal way, with an initial public offering (IPO). It was bought by a special purpose acquisition corporation, or SPAC, in late 2019.
These are very different processes. In an IPO, a company has to produce all sorts of financial documents and go around convincing investors that it is worth their while to buy shares. A SPAC has already issued shares to the public and is sitting on a pile of cash that has been entrusted to management for future investment. Essentially, the SPAC is expected to buy a company, which, in the end, allows that company to bypass the time-consuming and costly IPO process.
Just a few years ago there was a lot of hype around SPACs, and Virgin Galactic was an early acquisition in the space (no pun intended). It seemed like investors were willing to give anyone starting a SPAC money even though they had no idea what management would do with the cash. Logically, there would be diminishing returns, since there are only so many private companies worth buying and then only so many of that group that would be willing to sell themselves to SPACs. Eventually the hoopla surrounding SPACs turned south.
But investors that bought in were left with the SPAC deals that were completed, for better or worse. In Virgin Galactic's case, if you bought $10,000 worth of the stock when the SPAC acquisition closed it would be worth a touch over $3,500 today. That's not a good outcome, though it was a roller coaster ride along the way.
Hype versus reality
There were two stories behind Virgin Galactic. The first was the SPAC mania. The second was the excitement over private companies developing a space travel industry. That is specifically what Virgin Galactic wants to do, as it looks to pioneer human space flight for private individuals. At one point the $10,000 investment made at the IPO had turned into more than $45,000! But then the bottom fell out as the SPAC bubble collapsed and investors realized that Virgin Galactic would need to spend a lot of money to achieve its goal. Oh, and the company was up against some pretty material competition in the form of Jeff Bezos and Elon Musk, both of whom have similar space ambitions.
When financial results started to come in, it was clear that Virgin Galactic was going to burn red ink for years. While revenue has been trending higher, the company has yet to turn a profit. Debt, meanwhile, has been increasing, even though the ongoing losses mean it isn't capable of covering its interest expenses. That's a recipe for disaster.
To be fair, the company believes it is on track for "commercial service" for the second quarter of 2023, and as of the end of 2022 it had some $900 million in cash on its balance sheet. But it lost more money in 2022 than it did in 2023, and it burned through more cash as well. Then there's the not-so-subtle fact that a good portion of the cash it has came from an over-$400 million issuance of debt, which comes with interest expenses. Full-year interest costs rose year over year from $25,000 in 2021 to over $12 million in 2022.
The full-year cash outflow in 2022 was just shy of $400 million. So given the cash on the balance sheet, Virgin Galactic seems like it has enough financial leeway to keep muddling along for a little while longer. But it also seems like investors are increasingly in a show-me state of mind. Indeed, if it can't get its business up and running in a timely and profitable manner, there's likely to be more downside to come for the shares as the $900 million or so cash pile continues to diminish.
High risk, questionable reward
Virgin Galactic may very well achieve the feat of profitably exploiting consumer space travel. However, this is an upstart industry, and the company is burning through cash as it faces off against aggressive competitors. The risk-reward balance seems skewed in the wrong direction for all but the most aggressive investors. That remains true even after the steep decline in the stock, which could fall all the way to zero if Virgin Galactic can't find a way to (fairly quickly) become sustainably profitable.