Things were looking good

I last wrote about the company back in June. At that time, the Virgin Galactic share price had jumped 50% in the previous month. The company was flying (quite literally), thanks to another successful test flight. The following month, the company successfully completed the first fully crewed spaceflight. 

There was also optimism regarding the commercial side of operations. The business has been loss-making in recent years due to the high research and development costs. For example, it lost $210m in 2019, followed by $273m in 2020. Yet as the company moved closer to being able to launch the service to paying customers, deposits were finally coming in the door. 

Given that a seat is currently being priced at $450,000, it won’t take many sales to start recouping the firm’s large spend. In the latest results for Q3, 700 of the first 1,000 seats had been reserved.

Reasons for the drop

Given that momentum regarding flights and revenue is picking up, the slump in the Virgin Galactic share price since the summer could be surprising. However, there are a few issues I put it down to.

First, the company is by no means the only one in this area. Blue Origin and SpaceX are other prominent players that are vying to take the top spot. In my opinion, SpaceX is leading the way, due to a link with NASA. Earlier this week, the company launched several NASA astronauts into space.

Second, I didn’t think the latest results were all that positive. Adjusted EBITDA for the quarter was a loss of $68m compared to $66m from the same quarter last year. Despite revenue coming through the door, expenses are still high (and higher than this time last year).

Finally, could it be that the market got over-excited back in the summer? The Virgin Galactic share price shot higher, at one point giving it a market cap around $14bn. For a company that was loss-making, this premium attached to the outlook was quite steep. 

Unsure about the Virgin Galactic share price

Investing in stocks that are making losses isn’t always a bad idea. For example, Tesla was making large losses before becoming profitable recently, but the share price was still heading higher during this period.

So I think it really comes down to what future value I assign to Virgin Galactic. If I believe that commercial space aviation is going to be profitable years down the line, then the fall in the Virgin Galactic share price could make it a bargain.

However, I think there are going to be further bumps in the road. Therefore, I’ll be steering clear of investing in it right now.

But it seems not all investors share my enthusiasm as the stock has taken a nosedive this week. In fact, since Monday, the Virgin Galactic share price is down over 30%. While its 12-month performance is still up around 80%, the question remains – what’s causing this downward momentum? And is this a buying opportunity for my portfolio?

The crashing Virgin Galactic share price

The successful flight marks a massive milestone that the business has been working towards for 17 years. Yet despite this success, the stock is seeing an enormous level of selling pressure. And it’s actually quite understandable. Why? Because the company has since filed with the Securities Exchange Commission to sell up to $500m in common stock. It’s issuing new shares to raise additional capital for its next stage of commercial development. But, as a side effect, the Virgin Galactic share price is suffering from dilution.

Approximately 10.2 million shares are being offered. Comparing that to the existing 240 million shares outstanding indicates a dilution effect of around 5%. That’s certainly nowhere near as large as the 30% drop in price. But it’s worth noting that Virgin Galactic’s share count has increased by over 170% since 2018.

Given that the business remains pre-revenue, beyond the 600 pre-booked tickets sold, I don’t think the need to raise additional capital will disappear any time soon. In fact, I wouldn’t be surprised to see more shares issued in the future. Maybe that’s why selling pressure has been so high lately.

Time to buy?

Seeing a rise in the number of shares outstanding isn’t much fun for existing investors. But dilution effects are ultimately a short-term problem. Meanwhile, Virgin Galactic is receiving a significant surge of capital that can be reinvested in expanding its operations. The management team has forecast that the business will generate approximately $1bn of revenue a year per spaceport once in a commercial state. Assuming this target is reached, today’s $8bn valuation seems far more reasonable.

However, it could be several years before that becomes a reality. Meanwhile, other competing companies like Jeff Bezos’ Blue Origin and Elon Musk’s SpaceX are fighting for the same niche market of customers who can afford a $250,000 ticket. I feel this is important to highlight because all it takes is one fatal accident for the reputation of any of these businesses to be severely tarnished. If such a tragedy were to occur, it wouldn’t be difficult for competitors to quickly snatch up market share.

All things considered, I believe the Virgin Galactic share price has the capability of exploding over the long term. Having said that, there remain a large number of unknowns at this stage. And with its valuation seemingly being primarily driven by speculation, I’m keeping this business on my watchlist for now.

This flight, which counted Virgin founder Richard Branson as one of its passengers, has been in the works since 2004. Many analysts speculated the venture would never achieve this goal. 

However, after 17 years of work, the company has proved it can successfully take paying customers to the edge of space and bring them back safely. 

I think this shows the company’s now well on the way to full commercial operations. As such, I’ve been taking a closer look at Virgin Galactic stock to see if it could be worth adding the cutting-edge enterprise to my investment portfolio. 

Cutting edge technology

Unfortunately, while the company has proven its technology works, it still has to convince the world it can make this into a sustainable business. Now the technology’s sorted, this is the primary challenge the group has to overcome. 

The company has around 600 adventurers who have already paid deposits for tickets to fly into space. Costing up to $250,000 apiece, Virgin Galactic has been selling these tickets for years.

The group has slowed ticket sales while it finalised and refined its technology. But after last weekend’s successful flight, the company could start taking more bookings for wealthy customers soon.

One group of Wall Street analysts estimates the space tourism market could be worth $3bn a year by 2030. I think this shows the size of the potential market for the company. 

It’s planning further test flights this year before beginning regular commercial operations in 2022. 

To help fund the ramp-up to commercial operations, the firm recently announced it’s looking to raise up to $500m through the issue of new shares. This seems to be one of the reasons why Virgin Galactic stock has performed so poorly since the company’s initial passenger space flight. 

Virgin Galactic stock issue 

The new shares will reduce each existing investors’ claim on the business. Therefore, each outstanding share is technically worth less, diluting existing shareholders by around 6% (based on current market prices).

By comparison, over the past five days, Virgin Galactic stock has fallen nearly 19%. But over the past year, shares in the company have increased by around 105%. 

Based on these figures, it looks to me as if the market’s review of the business is far too pessimistic. As such, I think there could be an opportunity here. 

That said, there are plenty of risks on the horizon. Virgin Galactic isn’t the only company in the space tourism sector. It could face competition from competitors owned by Elon Musk and Jeff Bezos. 

Further, this is an experimental industry. Virgin Galactic already had to deal with a deadly accident in 2014. Another severe incident would almost certainly damage the group’s reputation. 

Despite these risks, I’m excited by the company’s potential. So, despite its speculative nature, I’d buy Virgin Galactic stock for my portfolio. 

The business potential

Virgin Galactic is a commercial space flight business. The goal is to create a brand-new market for space tourism. Individuals can spend $250,000 on a ticket to see our blue planet from above and experience zero gravity. But beyond this target, the company is also venturing into launching new Mach 3 aircraft to make international air travel far more efficient. Currently, a flight between Los Angeles and Tokyo takes around 12 hours. But with Virgin Galactic, that could be reduced to a third of that.

I can see why investors are excited by the prospect, especially since one of the firm’s chief competitors, Blue Origin, just sold its first ticket at auction for $28m! This is particularly important, since to date, Virgin Galactic has received around 8,000 flight reservations. Meanwhile, Blue Origin saw more than 7,600 participants in its ticket auction, the vast majority of whom were willing to pay up to $5m on a single ticket.

To me, that signals two things. Firstly, the space tourism market, while niche, may be much larger than initially anticipated. And secondly, Virgin Galactic’s seemingly expensive tickets might actually be incredibly cheap, relatively speaking. Is this the easyJet of the space travel industry? Regardless, it looks like finding customers won’t be a problem. And with an estimated $1bn of revenue expected to be generated per year from a single spaceport, the business looks like it could be about to take off.

The volatile Virgin Galactic share price

There are doubtless many contributing market forces responsible for the large swings in Virgin Galactic’s share price. However, whether I look at options traders, retail investors or short-sellers, there are two prominent themes – uncertainty and excitement.

In February 2021, the company announced its first commercial space flight would be delayed until 2022. This led to the stock plummeting. But then, following the successful flight test in May, it shot straight back up. And just last week, Virgin Galactic received regulatory approval from the FAA to take customers to space, launching the share price up by another 39% in one day. This level of volatility is hardly surprising, given that the stock seems to be entirely driven by speculation. After all, the firm has no existing revenues beyond advanced bookings that can potentially be refunded.

Needless to say, that exposes investors to a lot of risk. Suppose another delay occurs, or a catastrophic failure happens during product testing, or even worse, during a future commercial flight. These could have a considerable adverse impact on investor and consumer confidence, and consequently, the stock price.

The bottom line

In my opinion, Virgin Galactic has the potential to be a highly lucrative investment. But whether that will happen has yet to be seen. Given the level of uncertainty, this looks more like gambling than investing in my eyes, so I’m personally not interested. At least, not for now.

Once commercial flights begin and a clearer picture of the viability of this business begins to form, I may change my mind.

A long time coming

With companies like Virgin Galactic, I have to detach myself from letting my heart rule my head. This is in a similar way to deciding to invest in Aston Martin Lagonda. I love the company, but to me an investment in it doesn’t make sense. Virgin Galactic shares would have been in the same category when the company went public several years ago. The shares didn’t make large gains, and a lack of tangible success limited any potential upside for an investor.

This changed as we moved into 2019, with good progress seen via a successful test flight in orbit. Last month, the third successful test flight was conducted. The spaceship reached an altitude of 89.2km before returning the two pilots to earth in New Mexico.

This successful project was the main reason for the jump in Virgin Galactic shares last month. The company is planning three more test flights before opening its doors to the public in 2022. With my hat on as a potential investor, this is the milestone that really matters. It’ll be the point to really commercialise this business and take it from more of a research and development cash-burning business into a profitable one.

Do Virgin Galactic shares warrant an investment?

I note that the company has taken in over $85m in deposits for seat reservations so far. Ultimately, this isn’t enough to compensate for large operating costs. In 2020, the business spent over $158m in research and development costs. This led to a net loss of $273m for the year, larger than the 2019 loss of $210m.

I understand that companies like this lose money yet should reach an inflection point and move into the green. I also like that Branson was a pioneer with this idea back in 2004. My main issue though is that as I sit in 2021, Virgin Galactic isn’t the only player in the market. 

Jeff Bezos with Blue Origin and Elon Musk with SpaceX are both further along the process than Virgin is. Given that the industry is high-risk already, I struggle to see further upside for Virgin Galactic shares. I think progress has been too slow, and competitors are getting ahead. This could be compounded as future customers go elsewhere, leading to Virgin struggling to recoup the millions spent in development costs as revenue falls.

I could be wrong, and indeed my heart wants me to invest in this project that I’ve read about for over a decade. If the timeline can be accelerated to commercialise flights, and if demand is higher than I’m forecasting, Virgin Galactic shares could be a good buy. But as we stand, I can’t justify investing.