With its shares down roughly 82% over the last five years, Virgin Galactic (SPCE 3.15%) has disappointed its early investors. The ambitious space tourism company has faced operational delays, cash burn, and general uncertainty about the viability of its business model. Will the situation improve over the next five years, or will the stock continue to crash and burn? Let's dig deeper to find out.
An ambitious investment in the space industry
Virgin Galactic is a pioneer in a brand-new industry: space tourism, which involves transporting high-net-worth individuals to the edge of space to enjoy a brief period of weightlessness and spectacular views. No one knows for sure what this opportunity will be worth over the coming years. But UBS analysts believe it could grow to $4 billion by 2030 as companies invest more capital into their technical capabilities.
Virgin Galactic is an early mover. In late June, the company completed its first commercial spaceflight with six paying customers -- joining a small group of companies, including SpaceX and Blue Origin, which have also accomplished this feat. But despite achieving this long-awaited goal, Virgin Galactic is still yet to create sustainable value for shareholders.
What can the present tell us about the future?
Virgin Galactic's second-quarter results were a mixed bag. The good news is that it finally started generating revenue from its core operations. Sales jumped from $0.4 million to $2 million, driven by its commercial spaceflight and future "astronaut" membership fees. The downside is that growth isn't ramping up particularly fast. Management projects third- and fourth-quarter revenue of just $1 million and negative free cash flow (cash provided from operations minus capex) of $120 million to $130 million.
With a negative free cash flow of around $500 million annually, Virgin Galactic is burning through money at an astonishing rate, and its top line isn't growing fast enough to demonstrate a pathway to profitability.
Image source: Getty Images.
That said, the company has a plan to rectify its current challenges. And this could take shape over the coming years. For starters, it wants to improve flight capacity and margins through a new vessel design called Delta Class, expected to generate $2.7 million in revenue per flight, with six seats costing $450,000 each. With an estimated contribution margin of 75% per flight, scaling up the Delta program could be where Virgin Galactic's business model starts to become realistic and sustainable.
What will the next five years look like?
Management expects to finish manufacturing and begin testing its Delta spaceships in 2025 before they enter commercial service in 2026. But for investors, there are some concerns. First, Virgin Galactic's assumptions are not guaranteed to play out. The Delta project could face delays at any point in its manufacturing and testing. Second, the company will have to rely on outside sources of financing to make any of this possible. And it is not clear where this money will come from.
As of the second quarter, Virgin Galactic reports around $980 million in cash and equivalents on its balance sheet. And this can only support around two years of the current cash burn.
Over the next five years, investors can expect equity dilution, which is when a company issues more shares to raise capital. While this a means to raise additional capital, it is not necessarily good for shareholders because it reduces their claim on future earnings and cash flow. It makes sense to wait for more quarters (or even years) of data before considering a position in this high-risk stock.
