Richard Branson's Virgin Galactic preparing secondary public offering

Today I would like to talk about the company Virgin Galactic (SPCE ticker on NYSE exchange), which finally conducted its first suborbital flight on July 11 on the VSS Unity rocket plane. The company, born for space tourism in 2004, has achieved its goal with great difficulty. Once it seemed that Richard Branson would be the first in private space exploration, but the process has dragged on so much that we have already begun to forget about the existence of such a project, especially against the background of the success of Elon Musk's Space X, which is already making money on public space contracts. Let's see how the Branson project developed and what one should expect in terms of stock quotes.

From the company's history

Virgin Galactic originates in 2004. This year, it obtained a license for reusable spacecraft technology from Mojave Aerospace Ventures with the aim of creating a larger spacecraft for commercial use — space tourism. Virgin Galactic immediately began selling tickets for flights at a price of 250 thousand dollars. To date, more than 600 pieces have been purchased. According to the original plans, the first flights were supposed to take place in 2009, but this was not destined to come true. The company was plagued by failures. In 2007, a rocket engine explosion killed three people and several were seriously injured; in 2014, the first VSS Enterprise ship exploded during a test flight, killing one pilot. This did not stop the company and the second ship (the one on which the flight was made in July 2021) was built in 2016. The first flight with the engine took place in 2018, at the end of the same year, the ship successfully went into space. Considering this a success, the company merged with Social Capital Hedosophia, which became a reliable financial partner of the project. In 2019, Virgin Galactic's initial public offering took place, and the company is the only one of the top 3 private space companies whose shares are traded on the stock exchange.

The flight on July 11, in essence, is a continuation of test flights designed to hone technologies and eventually allow the first commercial flights to begin in 2022, which people who have bought tickets have been waiting for so long. In June 2021, the FAA (the US Federal Aviation Administration) expanded the license of Virgin Galactic to make commercial transportation of people on the company's ships possible from the point of view of the law.

Stock market and the Company

Since going public in October 2019, at a price of $10 per share, the company's quotes have been characterised by high volatility, replacing a sharp increase with an equally rapid and serious fall. For example, in May 2021, when the company could not once again accurately name the date of the flight, which was expected at the beginning of this year, according to the company in 2020. As a result, the shares fell to $16, having previously traded at the level of $60-62 per share. Then it was announced that Branson himself would fly and the quotes tripled, where they remained until recently. In July, a mistake was made, in my opinion — along with the news about the flight on July 11, the company also announced that it was planning a secondary placement of its shares for $500 million. It should be noted that the figures on the forecasts of the company's future revenue from space tourism are already included in the current price and it would be naive to believe that a successful flight will encourage investors to purchase shares of the company. Plus, any additional offering reduces their value due to that the so-called float (equities in free circulation) increases. On the background of the news about the flight, on Monday, July 12, the shares initially rose to the level of 52-54 dollars. Then there was a fall, and as of July 15, the company's shares are trading at $33 per share — a drop of 35%.

As you can see, the company's stock quotes depend on the mood of investors, positive news background, not on finance. Virgin Galactic does not generate cash flow, it is planned unprofitable in the process of “entering” commercial transportation — the basis of the company's business model. Attracting additional funds seems logical, since the company will face huge costs in the light of the preparation and launch of the space tourism programme in 2022.

Speaking from the point of view of future business, the potential of space tourism industry is large and experts estimate it at the level of $1 trillion by 2040. This market is just emerging, Virgin Galactic is among the top 3 companies in the industry, along with Bezos' Blue Origin and Musk's Space X. The main difference of Virgin Galactic is that it is not going to compete with the other two in terms of orbital flights (to the ISS in particular). The company was created purely for flights to suborbit, where there is already zero gravity and the curvature of the Earth is visible (up to 90 km from the surface). Blue Origin also has plans for the development of space tourism, and on July 20 it sends its ship to an altitude of 100-115 kilometres. It will be interesting to see how the Virgin Galactic quotes will react. On the one hand, this certainly increases interest in the industry, and investors will see that it is being successfully formed, which means there is growth potential. On the other hand, this is the launch of a direct competitor, respectively, a piece of the company's pie is reduced, in simple terms.

Let's look at the company's finances. According to the reports for the first quarter of 2021, the company has a good cash cushion on accounts in the amount of $617 million. Net loss decreased to $130 million, a year earlier this figure was $377 million. Adjusted EBITDA (this calculation, in addition to depreciation, taxes, interest on loans and borrowings, also does not include impairment losses, exchange differences and losses from related companies) in the amount of $56 million, a year earlier this figure was $53 million. Operating expenses increased to $72 million, a year earlier at the level of $50 million. R&D expenses amounted to $68 million, compared to $67 million a year earlier.

If we take into account all the factors mentioned, the only correct strategy in terms of Virgin Galactic shares would be to invest for a long time, despite the volatility. The pioneer of space tourism, in my opinion, will grow in any case, especially against the background of the launch of its commercial activities in 2022 and the success of competitors. In fact, of the big three private space companies, only Virgin Galactic is traded on the stock exchange. It does not make sense to participate in secondary public offering, since the quotes will most likely fall, and you will waste your nerves in vain. If you have a year of time and some free funds, this issuer is for you, that is, you buy and forget for a while. If the shares fall below $30 in the next week — it's time to buy them in your portfolio. It will be interesting to watch the development of events further.