Virgin Galactic: Spotlight On Sister Company’s Failed Rocket Launch (NYSE:SPCE)

Elevator Pitch

My investment rating for Virgin Galactic Holdings, Inc.’s (NYSE:SPCE) stock stays as a Hold, as I continue to have a mixed view of SPCE.

The focus of my earlier update for Virgin Galactic written on March 1, 2022 was the company’s move to “open up spaceflight ticket sales to the public.” With this latest write-up, I provide an update of SPCE’s recent developments.

The recently failed rocket launch for Virgin Orbit (VORB) has drawn investor attention to its sister company, Virgin Galactic. Considering that SPCE’s commercial flights have been deferred in the past, there is uncertainty relating to Virgin Galactic’s ability to meet the new Q2 2023 targeted timeline for commercial service commencement. That said, SPCE’s execution risks are partially mitigated by the company’s strong liquidity, robust spaceflight demand, and its pivot away from full vertical integration. I see the risk-reward for Virgin Galactic as being fairly balanced, justifying a Hold rating for its shares.

Virgin Orbit’s Failed Rocket Launch

Virgin Orbit’s share price fell by -14% on January 10, 2023, as CNBC reported on the “failure of its first UK rocket launch.” Virgin Galactic is Virgin Orbit’s sister company, as both SPCE and VORB share the same parent, Richard Branson’s Virgin Group. Notably, SPCE saw its stock price rise by +3% on the same day.

On the surface, it seems that Virgin Orbit’s recent woes are unrelated to that of Virgin Galactic. But a January 10, 2023 news article published by UK media publication Daily Mail highlighted that SPCE and VORB in aggregate had a relatively higher proportion of launch failures (8.6%) as compared to peers Blue Origin (4.3%) and SpaceX (2.9%).

Seeking Alpha News’ December 13, 2020 news report mentioned that Virgin Galactic had its “key test flight aborted” two years ago which led to a -14% drop in its stock price. Also, SPCE was earlier investigated by the Federal Aviation Administration (or FAA) with regards to a flight that “went off course” in mid-2021, as per a September 2, 2021 Seeking Alpha News article.

In other words, VORB’s recent failed rocket launch does bring execution-related risks and issues for SPCE into the spotlight. The timeline for the start of commercial passenger flights for Virgin Galactic’s VSS Unity spaceship has already been deferred twice previously. SPCE had initially guided for commercial service for VSS Unity to begin in Q4 2022, before subsequently announcing a delay in the commencement timing to Q1 2023. In August 2022, Virgin Galactic disclosed a further postponement of VSS Unity’s commercial flights to Q2 2023. It is reasonable to conclude that SPCE hasn’t executed as well on its plans as the market would have hoped for.

Blue Origin has already completed its maiden commercial flight in July 2021, so Virgin Galactic can’t afford to disappoint investors again. The recent failed rocket launch for SPCE’s sister company means that there will be greater scrutiny of Virgin Galactic’s execution capabilities, especially relating to its ability to deliver on the Q2 2023 timeline for the commencement of commercial flights.

But Positives Shouldn’t Be Ignored

I acknowledge that the multiple delays in the commercial passenger flight commencement date for Virgin Galactic’s VSS Unity spaceship have been disappointing to say the very least. But there are certain bright spots for SPCE which investors should also recognize.

Firstly, SPCE has the financial strength to weather the storm.

Virgin Galactic has roughly $1.1 billion of cash on its books as of September 30, 2022, according to management disclosures at the company’s most recent Q3 2022 earnings briefing in early-November last year. In addition, the company also revealed at its Q2 2022 investor call in August 2022 that it has “an aftermarket program to sell up to $300 million” in new shares.

In comparison, SPCE’s estimated cash burn for fiscal 2023 and FY 2024 are $521 million and $442 million, respectively based on S&P Capital IQ’s consensus financial forecasts. The sell-side analysts’ estimates of cash burn for Virgin Galactic seem to be realistic, given that the rate of growth in SPCE’s cash burn appears to be moderating. Virgin Galactic’s actual Q3 2022 cash burn of $107 million was less than what the company had previously guided for, and SPCE is expecting a relatively modest +17% rise in cash burn to $125 million for the final quarter of 2022.

This implies that Virgin Galactic has sufficient liquidity to stay in business.

Secondly, weak macroeconomic conditions haven’t really affected demand for SPCE’s spaceflights in a meaningful way, in contrast with what investors had feared.

A spaceflight ticket might cost a few hundred thousand dollars apiece, but most of the ultra-high net worth individuals that Virgin Galactic has targeted are unlikely to change their minds even in challenging times like these. Notably, Virgin Galactic stressed at the recent quarterly results call in November 2022 that “the economy and the world events” haven’t been “a weighting factor”, and confirmed that its “4 years of (passenger) backlog” remained intact.

Thirdly, Virgin Galactic has shown a willingness to be flexible when it comes to pivoting away from its vertical integration strategy and outsourcing production.

In July last year, SPCE announced that Aurora Flight Sciences will be tasked with constructing the company’s future motherships. Separately, Virgin Galactic disclosed in November 2022 that Qarbon Aerospace and Bell Textron will be appointed as “primary suppliers for Delta Class spaceships.”

These outsourcing moves should help Virgin Galactic to focus on its core competencies such as design, and also assist in reducing future expenses and cash burn to some extent.

Bottom Line

Virgin Galactic remains a risky investment proposition. SPCE has yet to begin commercial passenger flights (implying minimal revenue generation) and it had previously pushed back the timeline for commercial service twice. SPCE’s sister company’s failed rocket launch serves as a timely reminder of execution risks that it faces as well. On the other hand, I am encouraged by Virgin Galactic’s substantial cash balance, its decent passenger backlog, and its recent outsourcing announcements. As such, I think that a Hold rating for SPCE is fair.