After years of planning, space tourism company Virgin Galactic (SPCE 22.38%) is gearing up to begin commercial space flights. The company recently completed its final test flight, a critical milestone that signals the beginning of a new age.
The start of commercial flights will bring in much-needed revenue. That's indeed a sign that brighter days are ahead for shareholders -- especially after sitting through the stock's 93% decline from its peak, right?
Well, not so fast. Investors should hold off on opening the champagne, because the stock could remain grounded for several reasons. Here are three of them.
1. All of Virgin Galactic's eggs are in one monthly basket
Despite impending commercial flights, Virgin Galactic's space business remains exceptionally fragile. The flight experience involves a mothership (VMS Eve) that carries a smaller passenger ship (VSS Unity) to the borders of space, then lets it go. After a brief period of weightlessness, the passenger ship glides back to the Earth's surface.
Flights are expected to be conducted monthly in the beginning, generating limited revenue. But the company could be in trouble if something happens that takes its ships out of service.
Virgin Galactic is developing its next generation of ships that can fly more frequently -- its Delta Class -- but those won't be ready until 2026, according to estimates. Considering the numerous delays in getting initial commercial flights going and the small fleet Virgin Galactic currently has, investors are treading on thin ice. Any setback could push out the company's timeline to profitability, a luxury it can't easily afford.
2. Cash losses could bloat the share count
Virgin Galactic recently conducted its first space test flight in nearly two years, but that hasn't stopped it from burning cash. The company's free cash flow is steadily heading further south, including $139 million burned in the first quarter. Management has guided for cash losses between $120 million and $140 million per quarter for the rest of 2023.
SPCE Free Cash Flow (Quarterly) data by YCharts
That could drain another $400 million in cash by year-end, putting Virgin Galactic on pace to run out of cash sometime around the end of next year without significant changes. The company has steadily issued stock to keep raising money, something investors should keep in mind. Remember, adding new shares means that existing shares represent a smaller piece of the company. Outstanding shares have grown by 227% since Virgin Galactic went public.
3. Valuing the stock is a crapshoot
Arguably the worst part of investing in Virgin Galactic is that you have little idea what the business is worth in the long run. There is no revenue or earnings on which to base the stock's $1 billion market cap, and it's still a mystery what profit margins or growth the business will produce over time.
What if space tourism is a niche industry and Virgin Galactic struggles to sell seats at $450,000 a pop consistently? What could competition look like in the future? The reality is that any long-term projections on Virgin Galactic's business are built on a foundation of educated guesses, which means it doesn't take much to miss the mark completely.
Analysts believe earnings per share (EPS) will flip positive in 2028 -- six years from now. A lot can happen in six years, which makes the stock wildly speculative today. Investing is about using information to predict unknowable outcomes as best you can, but Virgin Galactic stock ratchets an already tricky task to near-impossible difficulty. The stock falls squarely into the too-hard pile.
