Shares of Virgin Galactic (SPCE 3.15%) have fallen more than 90% from their 2021 high-water mark. Clearly, enthusiasm for this space tourism company has waned in a big way even as it has proven that it can reliably fly people into space. The big problem for the company over the next year is that its finances are going to get increasingly weak.
Virgin Galactic hit the reset button
Virgin Galactic made a very big announcement when it released third-quarter 2023 financial results. It is going from a monthly cadence of space flights down to just one per quarter. The reason is pretty simple: The company is trying to preserve cash. Some simple math tells you all you need to know. Virgin Galactic brought in revenue of $1.7 million in the third quarter of 2023, the first in which it was regularly flying to space, but spent $25.6 million on its spaceflight operations. In Q4, the math was a little better, with revenue of $2.8 million and costs of $24.3 million.
Image source: Virgin Galactic.
Still, this clearly is not a sustainable business. To be fair, Virgin Galactic didn't really expect it would be. It has long discussed the need for a second-generation ship if it was going to turn a profit. The first generation was simply a way to prove that the concept of space tourism was viable. That new ship won't arrive until 2026 at the earliest.
Which brings up the next big comment from the third-quarter 2023 report. Virgin Galactic ended the period with $1.1 billion in cash and marketable securities. That's what it has to live on until it can get the second-generation spaceship up and running. It sounds like a huge sum of money, but it might not be when you consider that it burned through $105 million in cash in Q3.
Things will get worse before they get better
Assuming a roughly $100 million average quarterly burn rate, then the company had approximately 10 quarters or so of cash available as of Q3 2023. That's about 2.5 years, assuming that nothing goes wrong. The math here looks fairly accurate now that Q4 results are out, with the cash balance now down to $982 million and cash burn in the fourth quarter of $114 million.
But here's the problem that investors need to wrap their heads around: Even though Virgin Galactic is going to be flying people into space over the next two years, it is highly likely that the cash cushion will steadily shrink. For example, by the end of 2024 that $1.1 billion reported at the end of Q3 could be down to $600 million or less. This is back-of-the-envelope math, but it is directionally correct unless Virgin Galactic finds some new source of cash.
A money-losing Virgin Galactic with $600 million (or less) in cash that's burning through massive amounts of that cash each quarter probably won't be any more attractive in a year than it is today. In two years, using the same ballpark calculations, the balance sheet will be down to just $200 million (or less) in cash. That's cutting things very tight and assumes that nothing goes wrong.
In other words, Virgin Galactic will be a less desirable investment in a year. And if the next-generation ship doesn't launch on time, it will be even less appealing in two years. This is a very high-risk investment that only the most aggressive investors should be considering.
Nearing a binary outcome
If Virgin Galactic can't find a new source of funding, it is basically working toward a binary outcome. If the new generation of spaceship doesn't get off the ground as planned, the company could run out of cash. Were that to happen, it could end up in bankruptcy court, sell itself (if it could find a buyer), or simply shut down. But if the next-generation ship launches in early 2026, Virgin Galactic could very well turn into a long-term success story. Unless you can stomach that kind of binary outcome, you should probably sit on the sidelines as Virgin Galactic burns through its cash hoard over the next year or two.
