Shares of Virgin Galactic (SPCE 3.15%) blasted off following its reverse merger with a special purpose acquisition company (SPAC). It was able to start launching paying customers into space in 2023. But the hype around this space stock has clearly fizzled, given that it is down roughly 95% from its peak levels in 2021. Before you jump in, perhaps thinking the stock is a bargain, you need to understand these three facts.
1. Virgin Galactic reached an important milestone
On May 25, 2023, Virgin Galactic announced that it had completed its first successful space flight. About a month later, the company announced that its commercial space flight business was ready to start operating. There's no doubt that these two events were vital to the future of the company.
Basically, Virgin Galactic proved to the world that it could actually do what it was created to do. While that is an important milestone, the stock is still down nearly 30% in 2023. The two big announcements only resulted in a temporary uptick in the stock price. Basically, Wall Street seems unconvinced that the company can turn this early success into a profitable business.
2. Virgin Galactic needs a new ship
That pessimism about Virgin Galactic isn't at all unreasonable because the company itself admits that the current ship isn't enough. It was a proof-of-concept operation. The company's future is dependent on the next generation of its spacecraft (known as the Delta Class), which won't be operational until 2026. That, at least, is the currently projected date, things could change if there are development delays.
So, Virgin Galactic is still years away from a sustainable business. That said, the company has roughly $1.1 billion of cash on its balance sheet, which it believes will be enough to get the new ship off the ground. That sounds like a huge amount of cash, but building a spaceship is expensive. Virgin Galactic posted negative free cash flow of just over $100 million in the third quarter.
Doing a little back-of-the-envelope math, the company is at least eight quarters away from its 2026 due date, which assumes the Delta Class ship is ready on Jan. 1, 2026. If the burn rate is $100 million a quarter, it will only have a $300 million leeway to deal with potentially higher costs or delays that result in further cash burn. That seems like a bit more of a touch-and-go situation than investors are comfortable with given the stock price malaise.
3. Virgin Galactic is pulling in its horns
The worries about getting from today to 2026 have been exacerbated by the fact that Virgin Galactic has changed its plans for the current generation of spacecraft. At one point not too long ago the company was expecting to run regular monthly flights while it was building out its next generation of spacecraft. However, when it reported third-quarter 2023 earnings, that was scaled back to just a quarterly cadence. The reason for the change was to control costs.
SPCE Free Cash Flow (Quarterly) data by YCharts
That's not a great sign for a company that's spending huge sums on research and development. It suggests that the long-term goal of building a second generation of spacecraft isn't quite as attainable as the company once thought. It is a clear statement that just getting into space, while an important milestone, isn't enough to prove that Virgin Galactic can actually build the sustainable business it has promised. In other words, caution is probably in order given the retrenched position management has just taken.
Virgin Galactic is still all about the potential
If you like science fiction you will probably be deeply interested in Virgin Galactic as a business. It has, indeed, achieved notable successes as it looks to commercial space travel. But that alone isn't enough to make it a sustainable business. The company admits this, as it has long highlighted the importance of the Delta Class ship it is still building. For investors, the 2026 date for those new ships to be up and running and the cash demands of getting there are vital issues to monitor. Given the recent business pullback, the future for Virgin Galactic looks more uncertain than most investors will probably feel comfortable with.
