What happened
Shares of space tourism company Virgin Galactic (SPCE 3.15%) jumped 12.1% in June, according to data provided by S&P Global Market Intelligence. Through the first three weeks of the month, the stock was actually up more than 70%. But it came crashing back down to earth because of a pertinent financial issue.
So what
On June 29, commercial spaceflights finally commenced for Virgin Galactic. The company officially went public in October 2019, and management had hoped to start commercial flights in 2020. However, it took much longer than expected. Understandably, investors are excited that the long wait is finally over now, thanks to the successful flight of Galactic 01.
While the commercial space flight happened toward the end of the month, Virgin Galactic's management made the announcement on June 15, sending the stock skyrocketing. As mentioned, it was up more than 70% at one point during June.
However, on June 22, Virgin Galactic filed a document with the Securities and Exchange Commission (SEC) to raise up to $400 million with a stock offering. Considering the company's market capitalization was about $1.5 billion at the time of the filing, this is a massive stock offering.
According to the filing, Virgin Galactic needs the money for the "Development of our spaceship fleet and other infrastructure to scale our commercial operations." You see, while commercial operations are good for the company because it will now have much higher income, the reality is that its expenses will also be elevated as it scales. That's why it's turning to the stock market for funding.
For shareholders, the problem with this arrangement is that there will be more shares of Virgin Galactic going forward, which makes each share less valuable. As the chart below shows, the share count has been rising for Virgin Galactic, which is common for these early-stage businesses. But it's set to continue, and that's why the stock didn't hold on to all of its gains in June.
SPCE Average Diluted Shares Outstanding (Quarterly) data by YCharts.
Now what
Virgin Galactic expects to have its second commercial flight in August. And these commercial flights should become more common in 2023 and beyond. So the company is doing some cool things.
One of the big problems with early-stage businesses like Virgin Galactic is not necessarily understanding its potential but rather estimating how many shares there will be once the company is big enough to no longer need stock offerings. For Virgin Galactic, I'd say it's still a long way from being cash-flow positive. Therefore, it's important for investors to realize that the company could look to do more stock offerings at some point in the future.
