Stock crashes. Company goes supersonic!
Virgin Galactic (NYSE: SPCE) is still one of the best asymmetrical bets on the disruption in aero-space transportation — imagine going from London to New York in less than 90 minutes!
*** I’m currently long Virgin Galactic (NYSE: SPCE) ***
Stock crashes
Since the earnings call on Monday, August 3rd, Virgin Galactic’s stock (NYSE: SPCE) has fallen by more than 20%. That can be mostly attributed to the fact that speculators were betting on Richard Branson to fly this year to space. The company has reported that the inaugural flight will take place in the first quarter of 2021. Additionally, the company tries to raise around $460 million via a secondary offering by selling 23.6 million shares of its common stock at an offering price of $19.50 per share. The offering is expected to close on Monday, August 10th, 2020.
Here are the reasons why this company will be one of the best long-term investments.
I have written two articles at the beginning of this year, explaining the high-potential space travel business (sustainable competitive advantage due to strong barriers to entry, proven technology, and limited competition) and why Chamath Palihapitiya invested $100 million personally at a share price of $10 per share into Virgin Galactic.
Reason 1: Master-Plan
If you haven’t noticed already, Virgin Galactic is following a precise 3-phase master plan that can be described as the following:
- Phase (Commercialization): Serve the first 600 private customers via its five spaceships-fleet and generate additional revenues via taking research payloads for experiments in micro-gravity and suborbital space conditions.
- Phase (Expansion): Capture efficiencies of economies of scale to reduce price meaningfully to grow demand exponentially towards the majority.
- Phase (Disruption): Offer supersonic/hypersonic point-to-point travel to disrupt the $900 billion commercial aviation market, including the $600 billion total commercial passenger travel market.
1. Phase: Flight Program Update
Although Richard Branson is set to fly in Q1 2020, the company is very close to receiving the FAA approval to serve paying customers into space. It has already cleared 27 of 29 required criteria. The current pace of clearing three criteria per quarter should allow them to receive the approval within Q3 2020.
Virgin Galactic expects to conduct its first powered spaceflight from Spaceport America this fall, with two test pilots in the cockpit. After that, a second powered space flight with a crew of two test pilots in the cockpit and four mission specialists in the cabin will take place. Assuming both flights demonstrate the expected results, Virgin Galactic anticipates Sir Richard Branson’s flight to occur in the first quarter of 2021.
The company has recently named Michael Colglazier as a new Chief Executive Officer in preparation for commercial service. George Whitesides, the former CEO, will serve as Chief Space Officer to drive further growth in the orbital spaceflight and supersonic/hypersonic travel initiatives.
2. Phase: Expansion of fleet
The company has made significant progress on the second SpaceShipTwo vehicle with numerous structural and mechanical installations. It should be completed this year. In addition, over 75% of parts are fabricated for the third SpaceShipTwo vehicle. This one is expected to be finished in 2021.
But the most surprising thing is how quickly Virgin Galactic is trying to enter the third phase of its plan!
3. Phase: Supersonic Disruption
Most investors were probably assuming that the third phase would occur in the next 5–10 years. The great news is that Virgin Galactic successfully completed its Mission Concept Review, attended by NASA representatives, to design a Mach 3 certified delta-wing aircraft. The company also entered into a non-binding Memorandum of Understanding with Rolls Royce to facilitate further collaboration on the development of a sustainable, cutting-edge propulsion system for this type of aircraft.
This aircraft would be a significant step to bringing supersonic flights back to the aviation industry after the retirement of the Concorde. But this time, it would be two times faster than its predecessor. Possible flight times could be (excluding take-off and landing):
- Tokyo — Los Angeles: 2 hours 20 min.
- London — New York: 1 hour 30 min.
- Los Angeles — San Francisco: Under 10 min.
Potential disruptor of two industries
Virgin Galactic has the potential to disrupt two important industries: space and aviation.
The space industry will be one of the most lucrative industries of the following decades. Until the Space Shuttle Columbia disaster in 2003, the space industry was mostly dominated by governments. Since then, many private companies have begun to shape a new era for the space industry. Companies like SpaceX have already validated the potential value creation if you can provide astronauts and cargo into space on a regular basis efficiently. This industry will further grow and mature. Virgin Galactic will play a vital role in offering first suborbital and than orbital spaceflights. It has already signed a Space Act with NASA for private orbital spaceflight and entered into deposit agreements for orbital spaceflights with 12 customers.
Next to it, Virgin Galactic can disrupt the aviation industry by offering supersonic/hypersonic flights for passengers that want to travel from A to B in the shortest amount of time. This industry is already mature with a $900 billion commercial aviation market, including a $600 billion total commercial passenger travel market. The Mach-3 aircraft will have a capacity for 9 to 19 people and fly at an altitude above 60,000 feet.
Financial war chest
Virgin Galactic has a strong balance sheet with $360 million in cash and no debt (as reported in Q2). While the company is adding more potential revenue streams, the cash burn rate is staying at a constant $60 million per quarter. On top of that, the company has made most of the necessary capital expenditures due to Richard Branson's prior investment of $1 billion in building out the manufacturing facility and leasing the Spaceport in New Mexico.
With the additional $460 million from the public offering, the company will have a strong war chest to pursue further growth avenues e.g. orbital spaceflight and supersonic/hypersonic flights. This will give the company an additional runway to launch many exciting projects. The cash injection is similar to the IPO transaction.
The strong balance sheet puts Virgin Galactic in a prime position in comparison to other space and aviation startups. Boom Supersonic, which is also developing a supersonic aircraft, raised in total $140 million. There are currently only two other companies that have even better balance sheets and funding, SpaceX and BlueOrigin. Virgin Galactic can be one of the leaders in its industry.
Galactic opportunity
Virgin Galactic (NYSE: SPCE) offers one of the best asymmetrical bets on the disruption in aero-space transportation due to three reasons:
- Following a well-defined master plan from commercialization, expansion, towards disruption.
- Disrupting two significant industries: Space & Aviation.
- Building a strong financial war chest of around $800 million to support further development.
Let’s hope that in the future, we will hear regularly:
“Welcome to the club, astronaut!”
*** I’m currently long Virgin Galactic (NYSE: SPCE) ***
