What’s the point of being a billionaire if you can’t be a little crazy? I really believe this is the ethos that Sir Richard Branson lives by. His Virgin Galactic (Nasdaq:SPCE), which offers recreational space travel, is an audacious company. You could even argue that the business model behind SPCE stock is ridiculous.
But it’s a stock that has captured investors’ imaginations. Today, following Virgin Galactic’s earnings release, let’s do a deeper dive into SPCE stock to see if this pioneering space tourism stock is worth buy.
What Exactly Does Virgin Galactic Do?
Not much of anything – yet. The company plans to start offering commercial space flights starting early next year and is currently taking reservations. But for the remainder of this year, Virgin Galactic will continue doing test flights and not much else.
Once the company is operational, it will sell seats on its spacecraft for $250,000 or more.
The flights won’t really go anywhere, as commercial flights to the Moon or Mars are still likely decades away. But the experience will allow passengers to see the Earth from space. The whole thing takes about two to three hours and includes about six minutes of weightlessness, making it essentially a really expensive Disneyworld ride for adults.
At $250,000 per ticket, the company’s market is obviously somewhat limited. But it’s not necessarily reserved for eccentric billionaires like Branson. A high-end two-week vacation to Europe can easily cost $20,000 to $30,000, and an RV can easily set you back $200,000. And at that price tag, what would you rather have, a Winnebago or a trip into space?
While still clearly out of the range of most people, there are plenty of recent retirees that would consider it a bucket-list item worth paying for.
SPCE Stock Earnings Recap
Virgin Galactic reported second quarter earnings on Monday, Aug. 4, and Wall Street was a little less than impressed. SPCE stock lost 30 cents per share versus a consensus estimate of 27 cents. But perhaps the most conspicuous line item was the big, fat zero where you’d normally see revenue. The company reported zero revenues for the quarter and has brought in $238,000 year to date. That’s $238 thousand, mind you, not million.
But the real number that sent the stock lower this past week was 20.5 million. This is the number of new shares Virgin Galactic intends to sell to investors, which will raise about $500 million and dilute existing shareholders by about 10%.
Virgin Galactic expects to reach profitability by next year.
Is This Viable?
I question whether Virgin Galactic’s core business will ever be sustainable. Its spacecraft hold eight people, putting the revenue per flight at about $2 million. The company expects to eventually send a flight into space every 32 hours by 2023, or roughly 273 flights per year. That works out to revenue of $546 million per year.
We don’t have good information on the cost of launching a Virgin spacecraft, as the company has yet to publish that information. So estimating gross margins or net margins here would involve so much guesswork as to make it useless.
At today’s prices, SPCE stock trades at about 7 times expected 2023 revenues. That’s expensive for an unproven model that has yet to earn a dime in revenue.
And note that Virgin isn’t the only competitor in this game. Jeff Bezos’ Blue Origin and Elon Musk’s SpaceX are nipping at its heels.
All three of these companies are effectively the playthings of billionaires for whom making money may or may not be their first priority at this stage of the game.
SPCE stock might make for a fun trade. It’s certainly enjoyed a nice ride this year. But I’d recommend steering clear of Virgin Galactic with your nest egg. It’s just too speculative to justify a large buy-and-hold investment.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management LLC.