Virgin Galactic: Buy, Sell, or Hold?

Space tourism company Virgin Galactic (SPCE -1.75%) hasn’t participated in the flight of the broader market since January. Shares are roughly flat in 2023 even as the S&P 500 soared 17%. Clearly, the company is in the early days of ramping up its commercial program, where people can purchase seats on upcoming flight missions – and there’s still a lot of work ahead.

Should investors be considering the stock now? Or is it better avoided? This Fool has broken down the numbers to illustrate a clear path forward for investors. Here is what you need to know.

Commercial missions have begun, and revenue is trickling in

Virgin Galactic is trying to capture the space tourism industry. For roughly $450,000, you can buy a ticket on one of the company’s flight missions. Virgin Galactic uses a mothership to carry a passenger vessel to a high altitude, then releases it. The passenger ship then uses a rocket burst to reach its peak altitude before gliding back to the Earth’s surface. It’s a suborbital experience that produces a brief period of zero gravity.

It took several years of design and testing, but the company has finally begun executing commercial missions. That generated roughly $2 million in revenue in the second quarter of this year. The company did burn approximately $135 million in cash during the quarter, so that revenue is a drop in the bucket compared to what’s needed to run the business profitably.

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Still, it’s an important step. Just like a manufacturer will lose less money as volume increases, Virgin Galactic should eventually generate profits as the business does enough flight missions to begin offsetting the fixed costs of running the company.

But waiting for that day could be tough

The tricky question for investors is whether to wait for that day. After all, investors could be waiting a while. Management guided for just $2 million in revenue for the back half of the year. Meanwhile, cash losses will continue; free cash flow for both the third and fourth quarters is expected to hover between minus $120 million and minus $130 million.

SPCE Shares Outstanding data by YCharts

Virgin Galactic already has $417 million in debt and has continually issued new shares of stock to keep new money coming in to fund the business. That’s fine for the company, but investors are being repeatedly diluted. In other words, their existing shares lose value as new shares increase the number of outstanding shares. How many shares will there be by the time the company is done raising money?

The needed mission activity is years away

Unfortunately, the company is still a ways off from having routine flying missions. The current schedule is roughly one mission per month until more spacecraft can be built, tested, and introduced to the fleet. That would come with the company’s Delta Class, the next generation of its spacecraft.

Hypothetically, it would generate nearly $3 million in revenue per flight and could handle weekly missions. However, these spacecraft won’t be commercialized until 2026, according to management, and that’s assuming there aren’t any delays.

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So what’s the verdict? The stock already carries a $1.3 billion market cap despite generating virtually zero revenue – and so in my view, investors should probably avoid the stock altogether or sell if holding shares.

In the meantime, investors should look for continued development of the Delta fleet and more visibility into how much more dilution management could carry out to fund its operations over the next few years. Once that happens, it would be wise to reevaluate and take another look.