Why Virgin Galactic Is Spending 700M On New Spaceships

Why Virgin Galactic Is Spending $700M On New Spaceships

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Well, Galactic 01 is in the record books – and it was a great success for Virgin Galactic (SPCE -8.27%).

As Virgin MotherShip Eve departed Spaceport America in New Mexico just after 11 a.m. ET Thursday, she climbed to altitude and released her Virgin SpaceShip Unity at 11:33 a.m. ET, causing the latter to fire its engine and travel to the edge of space could fly. with three Virgin Galactic employees and three Italian Air Force passengers on board.

And it is important to emphasize this: the payment of the passengers of the Italian Air Force.

When Unity landed back at Spaceport America 16 minutes later, Virgin Galactic completed its first revenue-generating commercial space tourism flight, ushering in an era where not just one (Blue Origin) but two space companies (Blue and Virgin) now offer paid tourist flights to the All and back to.

Virgin Galactic math problem

Of course, it remains to be seen whether Virgin Galactic (or Blue Origin for that matter) can make a profit from this new type of tourism business.

As I have pointed out, Virgin Galactic is currently only capable of carrying a maximum of six passengers per space tourism flight. With a ticket price of no more than $250,000 and a frequency of flights no more than once a month (By the way, Virgin says that frequency will be reached in August), that only works out to about $1.5 million in revenue per month Virgin Galactic.

That’s not a lot of revenue to support a company that currently has operating expenses of about $500 million per year, $125 million per quarter, or more than $40 million per month. To offset the high cost of building a space tourism business, Virgin Galactic simply needs to increase the number of flights it can operate each month, quarter and year.

For that, Virgin Galactic will need many more spaceplanes. And each of these new spaceplanes will cost between $50 million and $60 million to build, according to Virgin Galactic.

Where will Virgin Galactic find the money?

Luckily for Virgin Galactic, there’s a solution to this problem, and it’s (perhaps unluckily for investors) in the form of selling more shares.

Last week, Virgin Galactic announced that the company had sold inventory – and plans to sell more to raise the cash needed to build its fleet of several new “Delta-class” spaceplanes. According to the company, Virgin Galactic has raised $300 million through the sale of nearly 60 million shares over the past 10 months. The company said it plans to sell another $400 million worth of shares in the future.

At the company’s current share price of about $4.25, that means there are about 94 million more shares to come. Consider that Virgin Galactic, for example, only had about 258 million shares outstanding at the end of 2021 (according to data from S&P Global Market Intelligence). This means that soon more than one in three Virgin Galactic stocks will be “new” Virgin Galactic stock, largely created and sold to raise the money needed to build the new fleet of Delta-class spaceplanes.

Will the money be enough?

Well, that probably sounds bad. The more new shares Virgin Galactic issues and sells, the more slices of Virgin Galactic’s “pie” will be sliced ​​- and the smaller slices will be left for those who bought into the stock prior to the dilution.

But there is both good and bad news here.

By my calculations, Virgin Galactic needs to build at least eight new Delta-class spaceplanes, each capable of flying once a week, to have any chance of generating enough revenue to offset its operating costs. So at $50 million to $60 million each — let’s say an average of $55 million — it’s going to cost Virgin Galactic $440 million to build the fleet it needs to be profitable.

So the good news is that the $300 million Virgin Galactic just raised, plus the additional $400 million the company plans to raise, should easily cover those construction costs — leaving $260 million left over , to cover the losses incurred by the company is expanding its fleet.

Combined with the roughly $830 million Virgin Galactic has in the bank and revenue from spaceflights with Unity, this could be enough money to keep Virgin Galactic in business through mid-2025, or (if Virgin Galactic finds a way ). to keep costs down even as operations ramp up) even in early 2026, when the first Delta-class spaceplanes are expected.

It’s going to be terribly close though. Personally, if I were an investor in Virgin Galactic, I would assume that at some point over the next two years, it will take at least one more stock sale worth hundreds of millions of dollars to close the gap and the remainder in Virgin stock Keeping Galactic on the road to profitability.

My advice: If you’re investing in the stock, keep this in mind and expect a little more dilution.