Virgin Galactic (SPCE 3.15%) has been a hot news topic of late as the company successfully sent a test flight into space. And then it followed that up with its first flight-carrying paying customers. These were wildly important steps for the company as it looks to, essentially, create a space travel industry geared toward consumers. But is this early success enough to justify buying the stock?
A steep decline
Back in 2021, investors were really excited about Virgin Galactic and the idea of space travel. The stock hit a high of around $60 per share. Today, in July 2023, the shares are in the low single digits, having suffered an over 90% decline from their high-water mark. Clearly, the enthusiasm has cooled off, but that doesn't mean that this space stock has fallen out of the headlines.
Image source: Getty Images.
In fact, it has just achieved two noteworthy milestones. First, it successfully completed a test flight with passengers in May. This provided a complete view of the preparation process and flight process. It followed that up with its first commercial space flight in June. This flight carried three people from the Italian Air Force and National Research Council of Italy, allowing these passengers to conduct scientific experiments. Scientists and people just going for a joy ride are expected to be key customers.
The goal from here is another space flight in August, followed by monthly flights thereafter. In other words, Virgin Galactic is on its way to actually providing regular space flights and creating the business it envisions. That's the good news.
Some problems
The likely reason for the huge stock decline is that Virgin Galactic is bleeding red ink and burning through cash. While it will start to generate more revenue once regular flights begin, it still costs a lot of money to run the business. The space flights are just the first issue, as the company is also building a second-generation spacecraft. So the current flights are really just a stepping stone.
A real read on the earnings front won't be available until the company reports its third-quarter earnings, at the earliest. The first commercial flight didn't take place until June. Since then, it has lost $0.57 per share in the first quarter of 2023. That was up from $0.36 per share loss in the same quarter of 2022. It seems likely that Q2 will see more losses.
The company guided for negative cash flow of up to $140 million in Q2, with negative cash flow of between $120 million and $130 million in each of the third and fourth quarters. That's after burning through $136 million in Q1. So, for the full year, the company will have negative cash flow of around $500 million. That's a big number when you consider that it had only $830 million or so in cash and short-term investments at the end of Q1.
In fairness, the company is still building its business, so the cash burn makes sense. But Virgin Galactic will need to continue tapping the capital markets for money at this rate. If it sells stock at current levels, investors will be diluted, and that's bad for current shareholders. If it sells bonds, the costs could be quite high, which will put more pressure on the top and bottom lines. Neither option is a great answer on the cash-raising front.
However, the biggest problem is that the company's pitch to investors about creating a sustainable space business is based on its next-generation spaceship. That ship, however, won't even begin testing until 2025, assuming everything goes well. The first flight is projected for 2026. That's just a few years from now, but a lot has to go right from here for a company that continues to hemorrhage cash.
Take a "show me" approach
This isn't meant to suggest that Virgin Galactic hasn't achieved great things or that it can't create a successful commercial space business. It is just to point out that, despite the hype around the flights so far, it is still a long way from a sustainable business. This is a situation where it probably makes more sense to wait until the company has achieved a few more milestones, specifically on the second-generation ship, before hitting the buy button.
