Virgin Galactic (NYSE:SPCE) missed all analyst estimates for the first quarter. It posted a larger-than-expected loss of $60 million, and revenues are down 87% year-over-year. The report featured a modest gross profit of just $65,000. Despite all that, SPCE stock surged 7.2%.
The good news for the company is that sales are finally materializing with the launch of its “One Small Step” initiative. This program attracts commitments for up to $100 million in revenues from astronauts looking to reserve their place in its flight queue.
CEO George Whitesides stated in a recent company release that “This response to our [initiative] demonstrates the appetite for our product.” Virgin Galactic is currently laying the groundwork for its space tourism plans, which could disrupt the multitrillion-dollar airline markets.
In other progress, Virgin Galactic completed two test flights from its spaceport in New Mexico in the first quarter and is working with aviation authorities to get its spacecraft approved.
With all the excitement regarding SPCE stock, it’s understandable why so many investors are interested. Unfortunately, its affiliation with the wider Virgin Group may put a damper on its plans.
Relatively Strong Liquidity Position
The highlight of Virgin Galactic’s financials is its liquidity, precisely, its healthy cash balance. The company has $419.4 million cash on its books, along with $12.3 million in restricted cash.
Virgin Galactic has very little debt as the majority of its funding comes from its internal resources. The only long-term liability for the company is its capital leases, and the bulk of its current liabilities are payables and accruals. With its sizeable cash balance, it’s quick ratio is very solid at 3.7.
The company burned through $60.3 million of cash in the first quarter. If it continues at the same rate, it could remain solvent for the next seven quarters. Till then, it is expected that the company will succeed in restoring some normalcy to its operations.
SPCE Stock Has a Troublesome Valuation
SPCE stock has been incredibly volatile since its IPO in October. It’s ranged from $7.26 to $37.35, a spread which is more or less double its current share price.
One of the reasons for such a vast spread is because the company is hard to value. The novelty of the business model presents a lot of challenges. However, in the past 90 days, the consensus price target for SPCE stock has risen considerably.
Analysts predict the stock will reach $29.67 in 12 months, which means that it is currently trading at a 97% discount. This is surprising, considering the company’s average fundamental rating is 3.5, while the S&P 500 average is 6.
It seems that the market has other ideas about the stock. Many investors feel that Virgin Galactic will deliver on its promise to take people across continents at hypersonic speeds.
Virgin Galactic Faces Threats
Virgin Galactic’s future is linked with the performance of its sister company, Virgin Atlantic. The two share Sir Richard Branson as a principal owner. Virgin Atlantic is the crown jewel of Branson’s corporate empire, but its future seems to be hanging in the balance because of the novel coronavirus.
According to Branson, Virgin Atlantic is going through “the most challenging time” it has ever faced. He has also approached the government of the United Kingdom to bail out the company with a whopping $620 million commercial loan.
It is safe to assume that if Virgin Atlantic continues on its downward spiral, Branson might have to choose which company he wants to save. According to reports, Branson is looking to sell as much as $400 million of his holding in SPCE stock to help salvage his crumbling business empire.
Branson’s Virgin Group announced that its subsidiary Vieco 10 Limited may sell 25 million of its common stock in Virgin Galactic. The Virgin Group said that it would “use any proceeds to support its portfolio of global leisure, holiday, and travel businesses that have been affected by the unprecedented impact of COVID-19.”
Considering the company is still in a nascent phase and is more of a passion project for Branson, it might be the first to go.
The Bottom Line
After several false dawns, space tourism is now finally becoming a reality. Companies such as Virgin Galactic are the leaders of this infant industry, which experts believe could generate $800 billion in annual sales by 2040.
Nonetheless, Covid-19 has significantly slowed down progress this year, putting the company’s liquidity to the test. What’s more concerning is the performance of Virgin Atlantic, which may ultimately impact the solvency of the company. It will be interesting to see which way Branson will go.
With this in mind, investing in Virgin Galactic at this time would be unwise. If you already hold SPCE stock, it’s best to sell it off before things get worse.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.