In 10 years, the space economy may be a trillion-dollar industry. Some analysts seem to think -- given the rapid growth of companies like SpaceX and Rocket Lab -- that this will finally be the decade of explosive growth in space. With all the innovation happening in the industry, nobody would be surprised if these projections turned out correct.
Despite this, I think we can all agree today that some of these space economy stocks were in a bubble in 2020 and 2021. A prime example is Virgin Galactic (SPCE +3.23%). The space tourism start-up once had a market cap of over $12 billion with minimal revenue. As of this writing, its shares are off by 96% from the all-time high they touched in early 2021.
Many smart investors and insiders have given up on Virgin Galactic stock. Is it time for you to do the same?
Forget rosy projections, look at the numbers
If you just looked at Virgin Galatic's earnings presentations, you'd think it was a leading company at the forefront of a fast-growing industry. Going back to the second quarter of 2020, Virgin Galactic was hyping up 2 million potential customers for its sub-orbital space tourism flights, 600 customers, and $80 million in total deposits. With tickets on a Virgin Galactic flight costing close to $500,000, it didn't seem impossible for this business to start doing hundreds of millions in revenue if it could consistently get its craft into orbit.
The problem is that Virgin Galactic has not shown any signs of growth since going public. Let's take a quick look at its financial statements to see how bleak the situation is. In Q3 2023, Virgin Galactic generated $1.7 million in revenue. That's it. It had $116 million in operating expenses. That means Virgin Galactic is running its expenses at 68 times the size of its revenue. Unless Virgin Galactic can quickly start launching more tourism flights to space, this business is extremely far from generating any profits.
Over the last 12 months, Virgin Galactic has burned over $500 million in free cash flow. With just under $1 billion in cash and equivalents on its balance sheet, it has around two years left before it will need to raise money from the capital markets.
Speaking of which...
SPCE Free Cash Flow data by YCharts.
Insiders have sold, and dilution continues
There were two leaders driving the growth narrative at Virgin Galactic: Richard Branson and Chamath Palihapitiya. When the stock started trading publicly, you could find both of them constantly in the media hyping up the potential of space tourism and the Virgin Galactic brand.
In 2021, Branson sold around $1.4 billion worth of Virgin Galactic stock, while Palihapitiya sold $213 million worth. Those moves don't inspire much confidence about the business. Today, Virgin Galactic has a market cap of just $833 million. The share price has been decimated, destroying nearly all the value of the investments of anyone who held onto their shares from 2021 through today.
The company has started to raise funds through an at-the-money offering, which means selling shares directly to the public at whatever price prevails at the moment of sale, rather than via large block sales or insider transactions. So if you bought shares of Virgin Galactic this year, it is possible the company was using you to raise funds and issue more shares. Generally, this is not a good thing. In just the second quarter, Virgin Galactic's shares outstanding figure grew by 20%. In the third quarter, it grew by 18.6%. This major shareholder dilution is reducing the slice of the pie that prior shareholders had in this business venture.
Frankly, Virgin Galactic is using public market investors to keep the business from running out of cash. If it were not regularly issuing new shares, the company would likely be on the verge of bankruptcy. Given its heavy cash burn, there's no reason to think these dilutive stock sales won't continue in the quarters ahead.
NYSE: SPCE
Key Data Points
Should you buy the dip?
The simple answer is that investors should avoid Virgin Galactic stock even trading 96% below its all-time high.
There are many ways to build wealth for retirement. Some investors favor safe blue-chip stocks like Procter & Gamble. Others may succeed by buying riskier early-stage businesses with tons of upside potential. But regardless of what strategy you use, before you buy a stock, you need to look at the underlying business with clear eyes and ask whether it is viable. All the evidence points to problems with Virgin Galactic. Avoid this stock until further notice.
