Shares of Virgin Galactic (SPCE 3.15%) are down 30% year to date, but not for a lack of progress from its underlying business. The tourism company completed its sixth successful human spaceflight in as many months in November and scheduled its next flight for late January 2024.
It also recently announced a "strategic realignment" to focus on scaling up its next-generation spaceship fleet over the next three years.
Is Branson's shrinking war chest reason to worry?
The bigger question on investors' minds, however, is whether the cash-burning business will have enough funds to survive that long. Shares plunged as much as 15% earlier this month after company founder Richard Branson indicated he has no plans to invest more money into Virgin Galactic.
"We don't have the deepest pockets after COVID, and Virgin Galactic has got $1 billion, or nearly," Branson said in an interview with the Financial Times, adding, "It should, I believe, have sufficient funds to do its job on its own."
Shares of Virgin Galactic have bounced back from that decline in recent weeks. But with echoes still ringing clearly from the recent bankruptcy of Virgin Orbit -- a previous spinoff from Virgin Galactic that Branson effectively opted not to bail out after a failed launch earlier this year -- it's hard to blame the market for its initial knee-jerk reaction.
On Virgin Galactic's path to positive cash flows
But that raises the question: Is Branson correct in thinking that Virgin Galactic has enough cash to scale up to sustained profitability? The short answer: Yes, but only if all goes exactly as planned.
Let's do some quick math: Virgin Galactic ended the third quarter of 2023 with roughly $1.1 billion in cash and marketable securities (including $997 million in cash and short-term investments) on its balance sheet.
But the company also told investors to expect negative free cash flow of roughly $130 million in the fourth quarter. At that rate, Virgin Galactic would only be able to survive another two years without raising capital. That would leave it just short of the company's projected 2026 time frame for commencing the first revenue-generating flights from its yet-to-be-built next-generation Delta Class spaceships, each of which will be capable of flying up to eight times per month.
Keep in mind, however, that Virgin Galactic's aforementioned strategic realignment should significantly reduce its quarterly cash burn, namely through a combination of selective layoffs, a shift to quarterly flights with its current VSS Unity spaceship, and reallocating resources toward investments to scale up its Delta Class spaceship fleet and spaceport locations.
Source: Virgin Galactic.
We're still in the early stages of Virgin Galactic's investment phase, but during the subsequent earnings conference call last month, management indicated its current cash position should be sufficient to bring Virgin Galactic's first two Delta ships into service. This in turn should enable the company to inflect toward sustained positive cash flows in 2026.
What's next for Virgin Galactic stock?
Virgin Galactic will shift to a quarterly flight cadence as it steadily works through its backlog of around 800 "future astronauts" who have already reserved their tickets. But whether it can actually reach its goal of inflecting toward positive cash flows in 2026 depends heavily on whether the company suffers any major missteps along the way.
I'm still personally holding my shares of Virgin Galactic. But as I noted earlier this year, I'm also still keeping the stock on a very short leash considering the company's long history of overpromising and underdelivering.
Thankfully, the above "up-front investment phase" should be relatively easy to track and quantify with each passing quarter as we analyze Virgin Galactic's cash flow trends and tangible milestones. And with the promise of lower interest rates on the horizon, the market environment for raising capital might become easier as well if the company's current cash pile proves insufficient.
In any case, without the potential backstop of Richard Branson and Virgin Investments propping it up, there's no denying that there's more pressure than ever on Virgin Galactic to finally deliver on its promises.
