Virgin Galactic (SPCE +8.57%) isn't just trying to build a space business, it is trying to build a space business for the average Joe. That is, for the average Joe who can afford to spend a reported $500,000 or so on space travel, which limits the target audience a great deal. Still, this is an audacious goal and the company reached an important milestone in the effort in 2023. But that first milestone isn't enough to make this stock a buy. Here's what potential investors need to know.
Virgin Galactic takes off
Up until 2023, Virgin Galactic was just an idea. Yes, there was a company, but it hadn't yet proven that space tourism was even possible. That changed in June 2023 when the company completed its inaugural commercial space flight (transporting research payloads for the Italian Air Force and the National Research Council of Italy). It then followed that up by sending the first private astronaut into space in August.
Image source: Getty Images.
After sending the first private astronaut into space, Virgin Galactic started running flights roughly once a month. That was evidence that it could put people into space regularly.
This is great news, and it suggests that there is the potential for a real business here. Only there's one problem: The company generated revenue of roughly $1.7 million in the third quarter of 2023 but spaceline operations cost $25.6 million. That's not particularly attractive math. The proof of concept was important, but it is not a sustainable business model.
Virgin Galactic is pulling back and focusing on 2026
Not surprisingly, Virgin Galactic has reduced its space flights to roughly once a quarter. That is allowing the company to save money while it works to build a new reusable spacecraft. That ship, known as the Delta class, won't be up and running until at least 2026. The new ship is expected to allow Virgin Galactic to operate its space tourism business in a cash-flow-positive way. This is the next big step, and it is the one that investors need to be monitoring very closely.
NYSE: SPCE
Key Data Points
Here's the problem. Virgin Galactic has to get through all of 2024, all of 2025, and at least part of 2026 before it has the Delta class of ships up and running. These ships are new, so all that time, it is going to be spending down its resources to build them. To be fair, the company had around $1 billion in cash available to it for this effort at the end of the third quarter of 2023. Management believes that will be enough to cover the cost of getting from here to there.
But building a spaceship isn't cheap or easy. Given the decision to pull back on the number of space flights in late 2023, meanwhile, it seems likely that pinching pennies will also be important. Virgin Galactic's future will look a lot less attractive if it faces any problems or delays with the Delta ships.
Summing that up, Virgin Galactic has proven it can get to space, but it hasn't yet proven it can profitably run a space tourism business. And it won't be able to do that until at least 2026, when it launches a new class of ship. To justify investing in the stock today, you have to believe that the Delta ship will arrive just as Virgin Galactic plans. If it doesn't, the company may not actually have a business. That's a pretty high-risk proposition that only the most aggressive investors should be considering.
There's a reason for Virgin Galactic's big price drop
Investing is about trade-offs. Given the success Virgin Galactic has achieved so far, there is a very real possibility that it will be able to turn cash flow positive with the introduction of the Delta class of ship. But there is still a lot to get done (including a lot of spending) before that potential outcome is even a possibility.
This is one of the reasons Virgin Galactic's stock price has fallen more than 90% from its peak. The early excitement has given way to the reality that Virgin Galactic is still years away from a profitable space tourism business. While the stock price is low today, the risk is very high. Most investors will probably be better off watching the company's progress from the sidelines until it is closer to launching the Delta class of rockets.
