Virgin Galactic (SPCE 3.15%) has big plans for the future. And it looks like the space flight specialist is inching closer and closer to those dreams. But there's still a long way to go, and one space flight shouldn't be enough for most investors to give this stock the thumbs-up yet.
Here's a look at some important facts you need to understand before buying Virgin Galactic stock.
There's a time limit
Virgin Galactic is burning cash as it tries to build out its space flight operations. In the first quarter, free cash flow was negative $139 million. In Q2, it is projecting a cash burn of as much as $140 million. That should fall to between $120 million and $130 million in the third and fourth quarters. So for the full year, the company is expecting to consume over half a billion dollars.
At the end of the first quarter, the balance sheet had around $830 million in cash listed. While there's no imminent worry about Virgin Galactic going broke, if keeps burning money at the current rate, it is going to need cash sooner rather than later.
Image source: Getty Images.
Adding to the problem is that Virgin Galactic has convertible debt that comes due in 2027. Given the drop in the share price over the past year, it seems likely that the $415 million it raised via the convertible will have to be repaid unless there's a significant move higher in the stock (allowing for the profitable conversion into stock).
Notably, during the company's first-quarter 2023 earnings conference call, management highlighted that the capital markets are more difficult today than they were not too long ago. This suggests that additional cash could be relatively expensive to obtain.
Meanwhile, the ships that Virgin Galactic is currently operating aren't the ones on which it hopes to build its business. The next round of ships, which have more seats for paying customers, won't be ready for testing until 2025. Commercial use is planned for 2026.
That's cutting it very tight with regard to the maturity of the convertible debt, which is on Feb. 1, 2027. Any delays or problems could leave the company with a big cash payment that it will have problems affording.
Generating cash
In fairness, Virgin Galactic's first commercial flight is an important milestone. Still, the near-term target of monthly flights with just four paying passengers probably won't generate a huge amount of revenue to offset the ongoing costs of building the next generation of ships. (There won't be hard numbers for the business until the company reports third-quarter earnings.)
It's also important to note that the calculations which management is highlighting for investors, with 75% contribution margins, are based on weekly flights of the next ship iteration. That ship doesn't exist yet.
That's why Virgin Galactic has been selling shares even though the stock has fallen more than 90% from its 2021 highs. Basically, in order to get from here to the hoped-for future successful space flight business, the company needs cash. And at the moment, it is willing to dilute current shareholders so it can keep going. Given the cash burn noted above, there's likely to be more dilution on the way.
It would be unreasonable to suggest that Virgin Galactic isn't doing incredible things. That even a single commercial space flight has been launched is, for many, the stuff of science fiction.
Still, it is still a long way from being a profitable business. Given that the next generation of ships isn't going to be operational until 2026 at the earliest, there's a lot of spending ahead before this company is on solid ground (note that the cash burn rates mentioned above include the operation of space flights in the second half of the year).
Even if the company gets there, current shareholders will likely find themselves owning less and less of the company with each new capital raise. That's just not a great investment story.
Best to wait
Virgin Galactic is an exciting concept, but it still isn't a financially practical reality yet, even though the company is ready to commence regular commercial flights. Most investors will likely be better off watching the stock from the sidelines until it has its next generation of ships successfully operating.
At the very least, it is worth waiting until third-quarter earnings are reported so investors can get a better picture of what the current business is capable of doing. At this point, Virgin Galactic has only proven that it can get to space, not that it can run a sustainably profitable space company.
