Virgin Galactic Holdings Inc. (SPCE) is an American spaceflight company that is part of the Virgin Group and is the world’s first commercial spaceline and vertically integrated aerospace company. It designs commercial spacecraft intending to provide space tourists with suborbital spaceflights. Virgin Galactic debuted on the New York Stock Exchange on October 28, 2019, under the ticker symbol ‘SPCE.’
The company announced its fiscal first-quarter earnings on May 10 which fell considerably short of analyst estimates. After delays in its flight test program and a loss that exceeded analyst expectations, the stock lost about half of its value since its late February highs before jumping higher on May 24. Its SpaceShip Two system has 4 test flights before it becomes available for commercial service in mid-2022. However, SPCE jumped 15% after the space tourism company announced that its VSS Unity spacecraft test flights would take place on May 22. The company’s test flight program, which was supposed to take place in December 2020, was postponed to February 2021 after the rocket engine named VSS Unity failed to ignite. It was further postponed to May due to an electromagnetic interference problem with the spacecraft’s flight computer. Analysts see a big upside to Virgin Galactic stock following the launch of its test flight as they anticipate strong demand for space flight tickets. More than 600 people have already purchased tickets ranging from $200,000 to $250,000 from Virgin Galactic.
First-Quarter Earnings Recap
Virgin Galactic reported a loss of $0.55 per share and zero dollars in revenue, and an adjusted EBITDA loss of $55.9 million, which was lower than FactSet’s estimates of $63.6 million. At the end of the first quarter, Virgin Galactic had $617 million in cash on hand, down from $666 million in the fourth quarter of 2020. The net loss was $130 million, compared to a loss of $377 million in the first quarter of 2020.
Doug Ahrens, CFO of Virgin Galactic, commented on the future outlook for the company in the first-quarter earnings call and said:
“Our goal is to address some of the consumer demand for our service while maintaining an appealing price point for the experience and an appropriate time horizon for flight for our private astronauts. We have not yet released updated pricing for our private astronaut market. We have a flight planned in partnership with the Italian Air Force that will demonstrate our capabilities for these markets. We expect this flight to generate $2 million of revenue or the equivalent of $500,000 per seat. On a per seat equivalent, we’re now entering into agreement at $600,000 per seat. We think these are excellent results for our introduction to the market.”
The company still has a lot to prove, but there seems to be an increasing demand for spaceflights, which presents Virgin Galactic with a lucrative opportunity to become profitable in the next decade.
Space Tourism Industry Outlook
The space tourism industry is expected to grow by $5.16 billion between 2021 and 2025, at a compounded annual growth rate of close to 14%. The growth of the space tourism market is primarily driven by increased travel and tourism spending. North America is expected to account for 61% of the market’s growth but the demand in Asia will increase at a faster rate than the North America region.
The decline in the cost of space tourism is one of the most recent developments that will help the industry gain traction in the coming years. Suborbital tours, rather than orbital tours, are a more cost-effective option for people who want to experience a space visit, according to a TechNavio survey. During the forecast period, the suborbital tourism market segment is expected to expand significantly. Virgin Galactic Holdings Inc., The Boeing Co., Blue Origin Enterprises LP, Zero 2 Infinity SL, Space Adventures Inc. are the key players in the Space Tourism market. The competitive position of Virgin Galactic in this new and competitive market highly depends on the completion of its flight-testing program which was considerably delayed due to technical anomalies and COVID-19 related business disruptions.
Credit Suisse analyst Robert Spingam recently wrote:
“As SPCE continues toward commercial service, primary competitor Blue Origin is making progress as well, and may actually send up the first revenue passenger in July on a ticket sold via auction. Blue Origin’s New Shepard spaceship has performed 15 test flights to date, though it has yet to carry any passengers, something Galactic has already achieved.”
The outlook for the industry is positive, but for Virgin Galactic to succeed in the long run, the company needs to secure first-mover advantages. More often than not, first movers into fast-growing industries report exponential revenue and earnings growth as the industry matures, and these players enjoy competitive advantages for an extended period of time. Netflix, Inc. (NFLX) is a classic example that proves first-mover advantages go a long way in helping a company develop an economic moat.
The stock of Virgin Galactic has dropped significantly in recent months before the launch of its first successful VSS unity test flight, owing to delays in flight tests and the sale of stock by Virgin Galactic founder Sir Richard Branson and Chairman Chamath Palihapitiya in recent months. However, SPCE rebounded following the recent test flight and projected strong demand for space flight tickets. The stock could be a good choice for growth investors due to the company’s long-term outlook, ability to address any technical problems, and emphasis on the safety and improvement of Galactic spacecraft. Even so, the company is still a long way from generating actual revenue, and investing in Virgin Galactic stock exposes investors to option-like risks and expected returns.
Disclosure: The author does not own any shares mentioned in this article.
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