Virgin Galactic Holdings Inc. (SPCE, Financial) has set its sights on the stars and is gearing up to propel its commercial space tourism service into reality. After years of trying to get its commercial operations up and running, it seems space tourism could finally become a reality. The company's management team said it expects its first commercial flight to take off later this month, sending shares rocketing upward by over 40% in extended trading on Thursday. Nevertheless, it is best to take the announcement with a grain of salt as the stock remains a speculative play.
The company completed its final test flight last month and is now preparing for its pièce de résistance. However, it would be best not to get starry-eyed, considering the chasm between test flights and a robust commercial operation.
Nevertheless, it seems to be charting an ambitious course at this time. Following Galactic 01, the company has an early August window set for its second commercial flight, with a vision for monthly voyages after that. Despite the allure of the stars, Virgin Galactic still has a considerable distance to cover before it reaches its lofty goal. Moreover, to expect a sustained stock rally even after it completes its first commercial flight seems unlikely.
A brief history
Virgin Galactic, Richard Branson's ambitious endeavor, certainly made an impression on its debut, with its valuation skyrocketing over $2.3 billion. However, the jubilation of the initial ascent soon faded as the company reported a humongous net loss of $86.7 million in its first six months. Unsurprisingly, it was just the beginning of the turbulence for the company's financial journey.
Now the company is caught in a cycle of persistent postponements. It initially planned for commercial release near the end of its first year as a listed company, but issues of different forms kept pushing the deadline back. This continued delay has cast a shadow over the company's stock, which has seen a plunge of over 30% in the past 12 months.
Despite its lofty claims of revolutionizing space tourism, Virgin Galactic has a ways to go before it can truly reach for the stars.
Why the bulls have it wrong
Branson's brainchild has had an iffy track record, to say the least. Still, as it ventures into the uncharted territory of commercial space travel, it is grappling with major financial turbulence.
The company ended 2022 with 800 tickets sold for its suborbital joyride, with 600 tickets priced at $200,000 to $250,000 and the rest at $450,000. However, its current spaceship, the VSS Unity, has a capacity of ferrying merely four paying passengers per journey, even with a targeted monthly flight cadence. Hence, it will take plenty for the company to break even given its lofty costs per spaceflight. On top of that, it will be a long time before it can clear out its backlog.
Virgin's present financials show massive operational expenses of $163.8 million in the first quarter with modest revenue of $392,000. It is important to note that these expenses are not solely attributed to spaceflight costs, but also encompass research and development, maintenance and administrative expenditures.
Eyeing a long-term solution, Virgin Galactic is banking on its upcoming spaceship Delta, which is slated to begin commercial operations in 2026. The new craft can accommodate more passengers and will have a more frequent flight cadence. Yet, this means the company can only start serving its high-paying clientele from 2027 onwards. Therefore, the unit economics for Virgin Galactic hinge heavily on the ship's successful deployment.
On the competitive front, the company's rivals are not sitting idly by. Blue Origin, a formidable competitor, is looking to resume its flights, which could dampen the potential market rally. Above all, the specter of launch failure looms large over all operators in this arena. Astra Space's recent failure is a stark reminder of the risks involved.
Takeaway
Virgin Galactic has been navigating an incredibly challenging environment since its inception in 2004, intending to make space tourism a reality. Despite a two-year hiatus, the company's successful crewed space flight in May rekindled investor confidence.
Moreover, the pressure is on as it gears up for the potential June launch. The company needs to start flying its backlog of 800 passengers and establish that it can sustain regular commercial flights. Despite the recent victory, the road ahead remains daunting and fraught with multiple challenges.
A sustained rally in the stock seems unlikely, especially as we factor in the current economic climate. The risk-off sentiment in the stock market is likely to continue for at least the year's second half. Moreover, Virgin Galactic has much to prove before it can ring a chord with savvy long-term investors.
