VIRGIN GALACTIC HOLDINGS
52-Week High $42
52-Week Low $7
Shares Outstanding: 196 million
Market Capitalization: $3.7 billion
BMR Target Price: $30
BMR Sell Price: $12
Coverage initiated April 30, 2020 at $17.30 in the Aggressive portfolio.
Company Overview. Virgin Galactic Holdings is not your typical aerospace company. It is at the forefront of providing space flights for individuals and researchers. When the service starts, space flights will launch from New Mexico and those on board will get a view of Earth and several minutes of weightlessness.
The company took its current form after a “reverse merger” in July 2019. A reverse merger is when a private company and public company merge and the former operates under the public company’s shell. The public company entity was started in 2017 as Social Capital Hedosophia Holdings, run by the fast-becoming renowned Chamath Palihapitiya, a “blank check” company, a firm that has no business plan but is formed for the purpose of acquiring another company acquiring it.
Virgin Galactic Holdings is under the Virgin Group brand, which initially started as a record store under Richard Branson. We believe Branson to be one of the greatest tycoons who has ever lived, and who has a knack for entrepreneurship, starting and running a series of successful start-ups. He is a billionaire many times over.
The origins of Richard Branson’s manned spaceflight vision go back to 2004. This is when his Virgin Galactic company formed and subsequently inked a deal to license the technology behind SpaceshipOne, which was funded by Paul Allen (Microsoft’s co-founder and tech investor), that was designed to take customers into suborbital space (outer space but low enough so that it does not complete an orbit).
A Virgin Galactic test flight crashed in 2014 but management appears to have righted the ship after encountering some turbulence. Subsequently, in the 2018-2019 time period, two manned spaceflights were successful.
This is a brand new industry, presenting an exciting opportunity with private companies picking up the slack, since governments have reduced sending humans into space for a variety of reasons, not the least of which is funding. With technological advances, sending private individuals into space has become realistic.
Competitive Analysis. The good news is that Virgin Galactic does not face a lot of competition. Better yet, it won’t for the foreseeable future due to the high barriers to entry. These include the large capital investment, regulatory hurdles, and the testing start-ups need to undergo to satisfy the government and potential customers.
The two main competitors are Blue Origin and SpaceX, both privately held. The former was started by Amazon’s founder, Jeff Bezos. It has successfully launched test flights, included manned aircraft. SpaceX was founded by Elon Musk in 2002, working with governments, including delivering a payloads to the International Space Station. It plans to send private citizens to space by 2022.
Financial Analysis. The company does not currently generate any passenger revenue. It has booked reservations, which number 600 at year end 2019. Right now, these are aimed at high-net-worth people. The deposits total $80 million with another $120 million owed, working out to $333,000 per person.
The company has generated a minor amount of revenue from delivering scientific payloads. For 9M19, it was only $2 million and the firm lost $155 million. As manned spaceflights get closer to reality, we expect revenue to meaningfully pick up, and profits to follow.
Virgin Galactic has no debt, providing some breathing space until bookings pick up. There is $85 million in cash.
Stock Performance. Virgin Galactic has been on a wild ride. Since the reverse merger in October, the stock has gone from $11 to $7, and then to an all-time of $42, in its brief history.
The news that NASA approved SpaceX to carry four people into space in 2021/2022 gave credence to the business model. With SpaceX already getting the stamp of approval, can Virgin Galactic be far behind? We don’t think so.
We see continued good things from the company. It has successfully tested the rocket and signed up customers
Boeing has a 1% stake in the firm. Chamath Palihapitiya (CEO of the prior public entity, Social Capital Hedosophia and currently Chairman of the newly formed company), and his team own 27%. Palihapitiya has his own interesting history since he was an early investor in Facebook.
BMR TAKE: Virgin Galactic is a high-risk, potential high-reward investment. Those willing to bear more risk are getting in on the ground floor of an exciting opportunity with huge upside potential. This has all the elements of a big winner. There is a deep-pocketed, visionary entrepreneur; a wide moat around the business; a business in the early stages; all providing huge potential. We have moved beyond the dream phase where individuals taking space flights are the stuff of science fiction. Virgin Galactic has also passed the discussion phase. This is moving ever closer to reality.
There are those put off by the lack of revenue. We are not in that camp since we see the path to booking revenue shortly. It even has a customer list waiting once the company is ready to launch flights.
We have a $30 Target Price, which could very well prove conservative if things work out the way we believe. But know this: This will be the riskiest investment you will ever make!