Paul Cerro

Dec 29, 2020

7 min read

Failure To Launch: Why SPCE Is Still Poised To Skyrocket

Summary:

  • Virgin Galactic’s botched test flight is actually a blessing in disguise.
  • The recent pullback in the stock is merely an additional buying opportunity.
  • Large cash balance and steady progress still.
  • Space tourism is just the cherry on top of the sundae — the real money is in suborbital travel & commerce.

Investors patiently waited for Virgin Galactic (SPCE) to finally initiate its long-awaited test flight, only to have it be aborted due to a connection issue. As soon as the company tweeted that the flight had been aborted and was returning to base, investors took to Twitter to cry out how badly the stock was going to tank that following Monday. With SPCE opening down ~17%, many were beating themselves as to why they didn’t take profits sooner instead of taking a chance over the weekend. Well, don’t beat yourself up because Virgin Galactic still has plenty of runway and that weekend helped the stock more than investors can understand at this point in time. Here’s why.

The Aborted Test Proves That Safety Should Not be a Concern

Virgin Galactic’s recent aborted test flight came off to investors as a complete failure, but what many don’t seem to realize was in actuality, this was a win for the company. Pre-market, Virgin Galactic was already down ~17% and people chalked that up to the engine not igniting. In reality, this should prove that all safety-related systems that were in place for the rocket took the necessary precautions to bring the ship down safely and in one piece.

For this, I think investors punished the stock way too heavily. If it were Elon Musk and SpaceX had a rocket ship that just blew up, no one would bat an eye and would mark it up as a necessary sunk cost so that it wouldn’t happen again. It might also have something to do with the company being private too, though the same principle applies.

This test flight proved that investors and future passengers have nothing to fear in regards to putting their lives on the line when they decide to view the earth 60 miles above sea level.

I would relate these proven safety measures to that of a car going to crash testing to make sure it’s safe for the consumer. Risk of systems failure on the way to space not a worry anymore? Point to SPCE.

The Most Recent Pullback is Overblown, Though It Can Be Another Buying Opportunity

For those of you like me, I’ve been watching the stock since it IPO’d through a SPAC in the fall of last year. I hesitated to buy when it dipped into the $7 range only to see it skyrocket to $42 in about a month’s time. *Palms face*.

Once we went into quarantine, however, this stock’s volatility made it a trading haven for all the technical traders out there when it bottomed out at $9. I can’t lie, I was trading it as it was slowly retracing its stock price with the frequent pullback, however, in the late summertime, I stuck my flag in the ground at $16.67 and haven’t looked back.

Source: Charles Schwab

Since then, the stock has hit an intraday high of $37 back at the beginning of December, which many were hoping and praying over that weekend for the test flight to go well so we could all see Monday morning the stock pop into the stratosphere. This was not to happen.

Many were upset with themselves because they didn’t take some money off the table to hedge their position a bit. I was one of them. Fear not though! If any investor out there wanted to jump in for the first time or shore up their position, now would be the time to do it.

With the stocks peak over the summertime at around $25, and it’s recent breakthrough, the price that was once its resistance is now its support and should help the stock maintain its bottom.

Source: Charles Schwab

I’m not a technical trader, but it is hard to ignore the fact that this stock is slowly retracing its way back up to its previous all-time high, and if all continues to go according to plan, it should not be a problem to break through those levels in due time.

They Aren’t Running Out of Cash Anytime Soon

With cash reserves shored up over 2020 through two capital raises, having over $740M in the bank should not worry you.

Given the projected burn rate of the company, which S&P Market Intelligence pegs at $244M, SPCE has enough runway with current operations for at least the next few years. Not to give them an excuse to use this time to burn through cash in the name of space and dilute us anymore, but there shouldn’t be a reason for them to raise capital in the near future to fund operations.

The Real Money Maker — Suborbital Travel and Commerce

While Virgin Galactic is positioned to make money via taking passengers to space and bringing them back down at roughly $250k-$300k a seat on a six-seater aircraft. Pretty expensive ticket, though there are plenty of people in the world that can afford that. There are over 2M people in the world with a net worth of over $5M and over 1M people with a net worth of $10M+. Repeat business can supply a lot of Virgin Galactics recurring revenue but the real money maker is in suborbital expansion.

Suborbital what? Yea, suborbital travel and commerce. What do I mean by that? Simple. Moving people and goods from one continent to another by launching so high up into the atmosphere that it sheds off hours of travel time to get from point A to point B.

Elon Musk brought this up back in 2017 and even included a video of how his BFR, at $10k a seat, could link New York City to Shanghai in about 30 minutes. Though this might not be feasible since rockets have about 100 uses before needing to be retired compared to the traditional commercial plane use of 10,000. The cost however should not be an issue. Right now, the most expensive flight in the world is $38k and that’s because of all the luxuries and amenities that are offered as part of the package. And that’s just for a one-way ticket! For Virgin Galactic to shuttle people from NYC to London at even $100k round trip, the company can see some real upside given the frequency of selected routes. Not to mention, many wealthy and businessmen and women would be open to paying that much if it means they can get across the world in 30min. This is not as farfetched as it may seem.

Heck, back in the day, passengers were paying $12,700 in today’s dollars to fly on the Concorde. That supersonic plane that traveled at Mach 2.04 (1,354mph), and could take you from NYC to London in just under three hours. Why not triple or quadruple that price to cut the time down to one-third or one-fourth? Seems to make logical sense to me, and the Concorde flew for 27 years!

I can speculate until the cows come home on how much Virgin Galactic would price these transcontinental flights but it wouldn’t make any sense. The real value is recognizing that there will be a market for this very niche service and that people would pay money to do it.

Even at $50k per person for a one-way flight (call it $100k round trip), a few times a week, with multiple routes, you’re looking at quite a money maker.

Now to top it off, having those same flights but that also carry high value cargo. Watch out UPS and FedEx, next day air could eventually be similar to Amazon’s same-day shipping except across the globe.

Source: British Airways

In Summary

Don’t let the recent pullback scare you. If anything, let it establish points where you feel comfortable taking some profits off the table as it slowly retraces, or to strengthen your position. This company is challenging to properly value since it’s practically trading at 100x 2021 sales, there are no comps, no real data to support a quantitative approach on what it should be worth. SPCE is a pioneer in the space (pun intended) that has allowed the average retail investor to go along on the ride.

As a pioneer though, just like Tesla was back in the day, you have to be willing to not waiver through the ups and downs of the stock as it tries to find its footing. If you invest in this stock, you better understand you’re in it for the long haul if you want to make some serious money here and be content with the potential for it all to crash and burn. This could easily be one of those stocks you read about 5 years from now where the headlines always start with “If you invested $1,000 in….”. Only invest what you can afford to lose and if the company finally makes it happen, maybe we’ll all make enough money to be on the same flight one day.