Virgin Galactic (SPCE 3.15%) achieved something truly out of this world in 2023 -- it began operating a space tourism business. For the science fiction aficionados out there, this is the stuff of dreams (unless you are rich enough to actually buy a ticket on one of the company's flights). But there's still one very big problem here, and it shows up clearly when you start to look at the company's financial statements.
Virgin Galactic rockets produce more losses than thrust
In the third quarter of 2023, Virgin Galactic's space travel business was basically up and running at its expected capacity of one trip per month. However, if you examine the earnings statement, that news doesn't look nearly as exciting as you might hope. For example, the company generated revenue of $1.7 million, but the cost of its space flights totaled $44.8 million. You don't have to be an accountant to figure out that the company would need to generate a lot more revenue before this business has any hope of turning a profit.
Image source: Getty Images.
The difference between cost and revenue is one of the key reasons why Virgin Galactic has decided to cut back its launch schedule in 2024. Instead of monthly flights, it will now only have quarterly flights. While that reduces revenue, the more important aspect of the decision is that it materially trims the cash drain that each flight causes. There are ongoing benefits, as well, since the company can also trim its staff, reducing its general operating costs.
As it turns out, the current spacecraft is little more than a proof of concept. Virgin Galactic doesn't expect to be cash flow positive until it launches its second-generation spacecraft. That won't happen until at least 2026, which is a long way away.
Image source: Virgin Galactic.
The balance sheet is another problem for Virgin Galactic
The first reason to fly less often is to limit the cash drain of operating a money-losing proof-of-concept rocket ship. The second reason is that it costs a lot of money to build any rocket ship, even if you have already proven you can do it. For example, Virgin Galactic burned through $105 million in cash in the third quarter. The vast majority of that was likely put to use building the next generation of spacecraft.
Assuming a burn rate of around $100 million a quarter, to keep the math easy, it will likely cost at least $800 million to get Virgin Galactic's next ship out of the atmosphere. And that's assuming nothing goes wrong, such as delays or cost increases. However, the company only has around $1.1 billion in cash available to it, according to management. That leaves very little wiggle room for error, given the huge costs involved.
So, another reason Virgin Galactic isn't going to fly as much in 2024 is because it needs to watch every penny lest it risk running out of cash. This was complicated recently by the founder of Virgin, Richard Branson, stating that he wouldn't be putting any more cash into Virgin Galactic. That's not exactly a ringing endorsement for the space stock, and it notably increases the risk that the cash runs out before the next-generation ship takes off.
Investors should watch this flight from the tarmac
Virgin Galactic may manage to muddle through the next two years to launch its second-generation spacecraft. And that this new spacecraft will be the linchpin that allows the company to operate a cash-flow-positive business, as it hopes. But the numbers suggest it will be tight and that the pullback in 2024 is a necessity if management hopes to reach its space tourism dreams. Only the most aggressive investors should probably be looking at this company today.
