A little over a week ago, news broke out that Richard Branson has now pulled the plug and won't be investing further in Virgin Galactic (NYSE:SPCE). The company's billionaire founder believes Virgin has enough resources to keep going on its own. However, followers of the stock can likely notice that this optimistic view doesn't align with reality. Virgin Galactic is facing substantial challenges, and Branson's decision to halt funding may prove to be the final blow. Consequently, I remain bearish on the stock.
Branson's Move Exposes Virgin Galactic's Lack of Business Model
In my view, Richard Branson's decision to halt additional investments in Virgin Galactic starkly highlights the absence of a viable business model for the company. This has been my longstanding belief since I started covering the stock in November of 2021. The stock was trading close to $18 when I first argued that investing in Virgin Galactic was not worth the risk. I have followed with a series of bearish articles since. Meanwhile, the stock has plummeted to about $2.36, and nothing has changed for the better.
The core issue here is that Virgin Galactic has been posting massive losses each quarter—it's nothing more than a bottomless pit. Given the lack of a sustainable business model, it appears that the company is doomed to keep losing money forever. Of course, this is the case as long as someone is willing to fund these losses, as the company's founder, Branson, has been doing so for a while.
But given the never-ending streak of Virgin Galactic's money-losing operations, who can blame him for finally pulling the plug?
As a reminder, Virgin Galactic's original business model, which still appears to be in effect, aimed to offer space flights at approximately $450,000. Richard Branson himself executed a successful space flight demonstration in the summer of 2021.
However, in retrospect, it's so easy to see that this "business model" was set to fail gloriously. The unit economics were fundamentally flawed, given the limited number of individuals who could feasibly afford, let alone choose to, embark on such a flight. This posed a substantial obstacle to establishing a consistent flight schedule, hindering the generation of regular cash flows and prospects for profitability.
Even traditional airlines that operate in a mature industry with steadily increasing demand for air travel often find it challenging to achieve profitability consistently. It's no surprise that an experimental space travel start-up was inherently set on an unprofitable course. For the record, Virgin Galactic has posted virtually no revenues since entering the public markets, with net losses amounting anywhere between $70 million and $160 million per quarter during this period.
How Long Does Virgin Galactic Have Left?
As I mentioned, a money-losing business can keep going on as long as someone is willing to fund it. With Branson pulling the plug on further investments, it appears that Virgin Galactic doesn't have much left to stay afloat.
According to the Financial Times, Branson noted, "We don't have the deepest pockets after Covid, and Virgin Galactic has got $1B or nearly. It should, I believe, have sufficient funds to do its job on its own."
The reality, however, is that Virgin Galactic has barely enough cash to survive, let alone do any "job" on its own. Sure, looking at the company's balance sheet, Virgin Galactic reports $997 million in cash and short-term investments, mirroring Branson's claim.
Yet, this should be enough to sustain operations for a couple of years at its current pace of losses. Over the past 12 months, the company has recorded losses of $549 million and free cash flow of -$514.3 million, and with no tangible plan to reverse this trend, I just don't see how the company can survive any longer.
Certainly, the company has the option to explore public markets once again to bolster its finances, either by issuing more equity or seeking loans from creditors. However, securing funding becomes challenging when the company consistently incurs massive annual losses without a clear strategy for a turnaround.
Opting for debt issuance would only compound the financial strain with additional interest expenses, while selling more equity would lead to further dilution. Nobody is lining up to fund Virgin, especially with Branson tightening his purse strings. Consequently, the company's access to funding appears to be firmly closed.
Is SPCE Stock a Buy, According to Analysts?
Regarding Wall Street's view on the stock, Virgin Galactic features a Moderate Sell consensus rating based on one Buy, two Holds, and four Sells assigned in the past three months. At $2.08, the average Virgin Galactic stock forecast implies 11.5% downside potential.
If you’re not sure which analyst you should follow if you want to buy and sell SPCE stock, the most profitable analyst covering the stock (on a one-year timeframe) is Ronald Epstein from Bank of America Securities, with an average return of 57.49% per rating and a 94% success rate.
In conclusion, Richard Branson's recent decision to cease additional investments in Virgin Galactic serves as a stark revelation of the company's inherent lack of a viable business model. From its poor unit economics to persistently massive quarterly losses, Virgin Galactic's trajectory has been far from sustainable.
While Branson believes the company can navigate on its existing resources, reality suggests otherwise. With limited funds and no actual turnaround plan, Virgin Galactic's future seems increasingly dire, raising doubts about its ability to stay afloat in the coming years.