The excitement around Virgin Galactic (SPCE +8.13%) has faded considerably. The shares are now down over 90% from the peak levels reached in 2021. But the idea of a space tourism business might still get the science fiction geek in you all worked up, and there's good reason for that.
However, an idea is not a business and Virgin Galactic has years of work ahead before it becomes a sustainable business. Given where the company is today, should you buy it, sell it, or just hold on?
An interesting few months for Virgin Galactic
When Virgin Galactic reported third-quarter 2023 earnings, revenue of $1.7 million was well ahead of the roughly $770,000 or so it brought in during the year-ago quarter. That's good news, for sure, driven largely by the fact that the company has actually started to fly customers into space on a regular basis.
As you work down the rest of the income statement, however, you start to get a sense that there's still a lot of work to be done, noting the $0.28 per share of red ink on the bottom line.
Image source: Getty Images.
This shouldn't be at all shocking to investors, as the company has been very clear that it won't even be cash-flow positive until the next generation of its spacecraft comes out and starts regular flights. The target date on that is 2026. Meanwhile, the company recently enacted some money-saving plans to ensure it could achieve that goal, which could be viewed as a bit troubling.
Essentially, the cost of operating the current spaceships the company has is expensive and the flights aren't actually doing much for the company's profitability. So, to reduce the cash drain, the company is decreasing the number of flights it will operate and shutting down the service earlier than it had previously planned. Doing that will also reduce the number of employees the company needs by around 18%. This move makes business sense, but suggests that getting to 2026 might be a bit more of a touch-and-go situation than investors would like.
Adding to the negative view, Richard Branson, the billionaire behind the Virgin brand, recently said he won't invest any more money in Virgin Galactic. The stock fell sharply on the news, which is hardly surprising. What is an investor to do from here?
Option 1: Buy Virgin Galactic
There's only one reason to buy a money-losing company that still has to invest huge sums of time and money into building a profitable business -- you believe it can do it. The company has stated that the $1.1 billion in cash and investments it has will be enough to support the business through the launch of the next generation rocket. So there is a reason to be positive, looking at the current unprofitable space operation as a proof of concept rather than a profit-making enterprise.
Still, buying Virgin Galactic requires a great deal of trust in management and emotional fortitude. Indeed, there's at least another year or two of huge cash outflows ahead before Virgin Galactic hopes to be cash-flow positive. Note, too, that cash-flow positive is different from generating positive earnings. In other words, 2026 is just the starting point for the company as it looks to create a profitable business.
NYSE: SPCE
Key Data Points
Option 2: Hold Virgin Galactic
Although holding Virgin Galactic rests on the same logic as buying it, there's another factor to consider. Given the steep stock price decline, you may be sitting on paper losses. Given the change in business plans and the target of 2026 for turning cash-flow positive, it seems unlikely that the stock is going to rocket higher anytime soon.
So you might consider capturing the loss if you have capital gains to offset. You have to wait at least 30 days before buying the stock back, or risk losing out on the tax-loss harvesting benefit, but that's unlikely to be a material issue here. If you still love the stock after 30 days you can buy it back. But at least you can put that steep stock price decline to good use.
Option 3: Sell Virgin Galactic
As noted, Virgin Galactic appears to be pulling in its horns in an effort to afford its long-term plans. That's probably a good idea, but it hints that earlier expectations for the future aren't working out the way management had hoped. So there's more doubt now, particularly as Branson backs away from funding the company, than there was before.
If you are a conservative investor, you'll probably want to wait until the introduction of the new line of spaceships is closer at hand. Or, perhaps even better, wait until the company is cash-flow positive for at least one quarter. That would provide a little evidence that there is a potential business here, which right now there really isn't.
Only aggressive investors should own Virgin Galactic
It should be pretty obvious at this point that Virgin Galactic is not an appropriate choice for risk-averse investors. The entire investment thesis rests on the belief that the company can actually build a profitable space flight business, but that won't even be testable until 2026. A lot could go wrong between now and then. This is an exciting business idea on many levels, but investors should still tread carefully.
