Share prices of Virgin Galactic (SPCE 3.15%) have fallen roughly 60% over the past year. The stock is down over 95% from its highs in 2021. Contrarian investors might view that level of pessimism as an indication that there's a buying opportunity here. Be careful; there are also very big risks. Here are three things you need to know before you buy this deeply out-of-favor space stock.
1. Red ink on top of red ink
The first big thing that any investor in Virgin Galactic needs to understand is that this company is still, basically, in the start-up phase. It has proven that it can fly paying customers into space, which is great. But it hasn't proven that this is a viable long-term business. There are two facts to consider here.
First, it is expensive to start any business from scratch, which is what Virgin Galactic is doing. But it is extra expensive when that business requires the construction of massive spaceships. The company has lost money from Day 1. And while it was important to prove that it could get to space, the current business isn't anywhere near close to being profitable.
To put some figures on that, in the third quarter of 2023, which was the first in which it transported paying customers, Virgin Galactic produced revenue of $1.7 million, while the company's space flight operations cost $25.6 million. That doesn't even take into consideration other costs that the company faces, like research and development and sales, general, and administrative expenses.
Given that the company is working on a second-generation spaceship, it is highly likely that the red ink will keep flowing for longer here. That materially increases the risk investors face.
2. Enough cash if nothing goes wrong
Along with the company's third-quarter 2023 earnings results, management noted that it has around $1.1 billion of cash available to fund its capital investment needs. That sounds like a lot of money, but the company had a negative cash flow of $105 million in the third quarter, which, at that run rate, means that $1.1 billion will only last for around 10 quarters.
Here's the thing -- the next generation of spacecraft isn't expected to be operational until early 2026, which is roughly eight quarters away. The company has stated that the next spacecraft is the one that will enable the company to operate a cash-flow-positive space tourism business. Getting from here to there is the problem, and there isn't much leeway. Six months of delay is all it would take to push that cash balance down to nearly zero.
Simply put, a lot has to go right over the next two years if Virgin Galactic has any hope of becoming a profitable business.
3. Execution will be everything
Here's where things get really interesting. When the company started sending paying customers to space, it had planned to run flights monthly. That has now been reduced to a quarterly cadence. The reason is simple: Virgin Galactic wanted to cut costs. That suggests that management may be more worried than it is letting on about the state of its balance sheet.
But that's not the only financial concern that the company has to face. Virgin founder Richard Branson has openly stated that he doesn't intend to provide Virgin Galactic with any more cash. That means there's no backstop if things don't go as well as planned.
The big takeaway is that solid execution will be vital. And, as if on cue, the company was forced to report a flight issue to the FAA after its last space flight. While nothing bad happened as a result of the problem, it highlights the fact that things can and do go wrong. That's not unique to Virgin Galactic, but this particular company doesn't have a huge amount of financial leeway to deal with unexpected events. If you buy this stock, you'll want to watch the company like a hawk.
Virgin Galactic is a high-risk stock
Virgin Galactic may do exactly what it set out to do and build a profitable space tourism business. If it does, today's low stock price will, in hindsight, look like a bargain. But this stock isn't appropriate for most investors because of the inherent risks, like ongoing losses, limited financial resources, and the importance of everything going right for it to muddle through the upstart stage in which it still finds itself. Tread carefully.
