Virgin Galactic is weeks away from reaching milestone

Be a space tourism still in its infancy, Galactic Virgo (NYSE: SPCE) The stock was hit as hard as any other tourism operation when the coronavirus pandemic swept the world. And like many other tourism businesses, the company has managed to recover somewhat from the recession, but its shares are still trading well below highs reached before the market crash in late February.

A sign of hope for Virgin Galactic, plans are nearing completion to perform its final test flights and potentially open its commercial service to the public.

Now that the ship (s) could take off soon, is this commercial space line operator going to explode or go bankrupt?

Last tests before take off

Virgin Galactic engineers plan to complete testing of the company’s SpaceShipTwo system on October 22. If successful, this test would mark a major transition for the spacecraft on which the company bases its operations. The vertically integrated company has spent the past two years preparing for the day it can send its founder Sir Richard Branson, and these next two suborbital flight tests will prove whether its efforts to start commercial service are on track.

Image source: Virgin Galactic.

Virgin Galactic has invested more than $ 500 million in its mission, aiming to be the first in commercial space tourism. Like many start-ups, the company has spent significantly more than it could possibly earn in the immediate future. In the case of Virgin Galactic, the money consumption has been even higher: it turns out that space development is a very, very expensive business, and without a product, the business has fallen deeper into the red with each passing year. quarter that passes.

However, there was considerable interest in its last successful flight in February 2019, which resulted in the booking of more than 600 space flight tickets and more than $ 80 million placed in deposits. In total, since its very first test flight in December 2018, Virgin Galactic has received almost 8,000 requests for interest through very passive marketing efforts.

Demand estimates remain high

Of course, assuming Virgin Galactic passes these next test flights, the company’s founder will likely be the first future astronaut – the descriptor Virgin Galactic uses for its space planes. This would mark the start of the company’s commercial service, which includes a three-day pre-flight visit to the Virgin Galactic Spaceport and a 2.5-hour suborbital flight into space.

Yet with so much expense involved in developing, testing and sustaining a space flight operation, will Virgin Galactic ever be able to turn a profit?

In fact, almost all stock market value stems from high consumer expectations. At present, Virgin Galactic has negligible income compared to its expenses. The company recorded $ 230,000 in revenue in the first six months of 2020, up from $ 2.4 million in the prior year period, as operating expenses jumped 40% from year after year.

But a recent Cowen survey found that a significant number of individuals with a net worth of over $ 5 million are very interested in commercial space flights and are willing to pay $ 250,000 for a single ticket. Virgin Galactic has also confirmed that its short-term customers will be primarily individuals with a net worth of over $ 10 million.

Earth view from space

Image source: Virgin Galactic.

To date, only 575 astronauts in the world have left Earth’s atmosphere, and the attractiveness of such a trip remains extremely high. Beyond that, the United States Chamber of Commerce estimated that while the commercial space industry was worth $ 385 billion in 2017, by 2040 that number could very well reach $ 1.4 trillion.

The potential for monetization is therefore very present and the company has the capacity to fly humans in space in the near future. The issue of profitability, however, is a long term issue. Virgin Galactic will launch commercial service with a single ship and a single carrier aircraft, and as a result, the theft rate will be heavily constrained. This can result in initial ticket prices exceeding $ 250,000 per person, which is somewhat to the benefit of the company as it would increase revenues over costs, but it would also limit the company’s ability to expand its activities. After all, only six passengers can get inside the VSS Unity spacecraft, and launches are heavily subject to weather conditions and equipment readiness.

To remedy this, Virgin Galactic is already preparing to manufacturing two additional space flight systems. This expansion of the fleet would then increase the annual flight rate and help the company consolidate its status as the first and perhaps the leading space tourism operator in the world.

In terms of profitability, however, these upcoming flights will serve as a turning point if successful. The faster Virgin Galactic gets to send people to space, the sooner it will be able to meet consumer expectations for its decidedly cool product.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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