Shares of upstart space tourism pioneer Virgin Galactic Holdings (SPCE 5.44%) are up 11% since January on hopes that the company's planned launch of commercial flights in the coming months will bring in much-needed revenue.
But rather than getting ready to go to the Moon, investors should be cautious. The stock's recent run could end up as a failure to launch. While initiating commercial flights is a critical step in the right direction, it could bring new challenges.
Here is why investors should consider staying on the sidelines for at least the next several quarters.
How much revenue can Virgin expect?
Virgin Galactic will begin commercial flights in the second quarter with its mothership VMS Eve and glider ship VSS Unity. The Unity glider ship is designed for approximately 12 flights per year and holds six passengers at a time. Assuming Virgin Galactic performs monthly flights for the second half of 2023, that's 36 passengers flown this year.
NYSE: SPCE
Key Data Points
The flight costs $450,000 per passenger, so that's $16.2 million in potential revenue from flights. Analysts are in the same ballpark; consensus estimates expect $12 million in 2023 revenue, followed by $44 million in 2024 and $91 million in 2025. There's an anticipated spike in 2026 revenue estimates due to the anticipated completion of new facilities and fleet expansion.
That's assuming a lot of things go right -- in other words, no disruptions to flight schedules, selling out flights at full ticket price, etc. It's not impossible, but investors have already seen a handful of delays in getting commercial flights going in the first place.
Cash losses could get worse
Virgin Galactic's problem boils down to whether it can make a cash profit before it runs out of money. The company burned nearly $400 million over the past year and hasn't even started commercial flights. Management guided for cash losses between $135 million and $145 million in the first quarter of 2023, an annualized rate of $540 million that would exceed 2022's cash losses.
Commercial flights could easily increase operating expenses as each flight requires a new solid-fuel engine replacement, which costs around $250,000 each. That's not factoring in increased staffing, post-launch marketing, and more.
SPCE Cash and Short Term Investments (Quarterly) data by YCharts
At the very least, the company's initial launch won't come close to generating enough revenue to stop losses. It could take three to four years to get revenue up to 2022's cash losses. The company has roughly $500 million in net cash ($909 million in total), enough for somewhere between two and three years of operations (assuming losses don't pile up faster).
Too risky to try the stock
Virgin Galactic could find itself at the end of this year facing the need for a capital raise as cash dwindles. The existing debt and higher interest rates make borrowing a tough pill to swallow. Management might instead put the burden on shareholders, issuing new shares of stock for cash. New shares make existing shares worth a smaller piece of the business (decreasing share price), something called dilution.
The company has a $1.1 billion market cap at its current price, so raising even a few hundred million dollars would require a lot of new shares. Investors will have a harder time realizing investment returns if new shares flood the market.
Add it all up, and Virgin Galactic might be in your "too hard" pile. Rather than invest in a company with so many unanswered questions about its future, investors should stay away until it puts up some numbers that answer these concerns.
