On July 11, 2021, Virgin Galactic (SPCE +0.40%) founder Sir Richard Branson flew to space (and back).
Cheers erupted around the world in response to Sir Richard's accomplishment. But in fact, perhaps the even bigger news for Virgin Galactic arrived two weeks earlier, on June 25. That was when the U.S. Federal Aviation Administration awarded Virgin Galactic its "full commercial launch license" to begin conducting space tourism flights.
Sir Richard's space romp last weekend was the first such flight -- but it won't be the last.
Image source: Virgin Galactic.
What comes next for Virgin Galactic
As Virgin Galactic announced last month, the FAA's decision "updated the Company's existing commercial space transportation operator license [which authorized its five-years-long series of test flights] to allow the spaceline to fly customers to space."
Virgin Galactic's new license was the first license to fly tourists to space that the FAA had ever authorized. (Although two weeks later, the FAA awarded a similar license to Blue Origin, preparatory to that company's first crewed spaceflight which is scheduled to happen tomorrow). And yet, even with license in hand, and even with Sir Richard back safe and sound on the ground, Virgin Galactic isn't quite ready to begin full-scale space tourism launches yet.
Two more test flights remain to be conducted "before the Company expects to commence commercial service in 2022," says Virgin Galactic.
2022 and beyond
And it is 2022 when things will really get interesting for Virgin Galactic investors.
Beginning next year, Virgin Galactic will start working through its backlog of 600 space tickets already sold, sending tourists to space, and then move on to explore how much larger this market might get. In that regard, consulting company Capgemini estimates there are 20 million-plus millionaires in the world, of whom roughly one-third live in the U.S. Any or all of these people could theoretically afford Virgin Galactic's well-publicized $250,000 ticket price.
For that matter, the U.S. alone boasts some 1.5 million "decamillionaires" -- persons worth $10 million or more, for whom the cost of a Virgin Galactic ticket represents 2.5% or less of their wealth. Selling a ticket to this audience might be even easier: "Let's see, you can spend 2.5% of your wealth today, and get a ticket to space -- or you can wait a year, watch inflation eat up that same 2.5%, and get nothing!"
Crazy as spending $250,000 on a 10-minute space ride might sound to your or me, there are a lot of people to whom the idea may actually make sense -- enough people to replenish Virgin Galactic's current waiting list of 600 ticket-holders 2,500 times over.
The trouble with Virgin Galactic
This is why I don't think Virgin Galactic will have any trouble finding customers, or generating revenue now that it's got a license that permits it to do so. (At least not so long as its spaceplanes fly safely. If any of these flights ends in a fiery crash, that might put a crimp in the business).
More immediately, what worries me is whether Virgin Galactic will be able to earn a profit.
Recall: Every time Virgin Galactic takes off with a full passenger complement of six tourists paying $250,000 a pop, it will generate $1.5 million in revenue. No sooner will Virgin Galactic's spaceplane land, however, than it must immediately spend between $250,000 and $275,000 (roughly the cost of one of those space tickets) to replace the engine.
Granted, Virgin Galactic believes that the cost of replacing an engine after each flight will "come down significantly over time as we scale and enhance efficiencies." But scaling the business will itself cost money. Virgin Galactic hopes to open multiple spaceports around the globe, and to equip each with about eight spaceplanes, costing between $30 million and $35 million apiece.
After a call with Virgin Galactic $SPCE executives, Jefferies says the second SpaceShipTwo spacecraft is on track to roll out by the end of 2020.
— Michael Sheetz (@thesheetztweetz) September 16, 2020
–Cost to produce more spacecraft targeted $30M-$35M per vehicle
–Each built to last 10+ years and fly 50 flights per year pic.twitter.com/fqB2TFmSyu
And yes, once all those new spaceplanes are built, and once all those new spaceports are opened, Virgin Galactic may be able to mass produce its disposable engines at a lower cost. In the meantime, though, it must spend money on engines, more money on spaceplane maintenance, more money to pay its pilots, maintain its infrastructure, and cover overhead costs, and find money to finance its expansion costs.
Long story short, it could be a very long time before we see Virgin Galactic show anything resembling a profit -- which is probably why the company announced plans to raise $500 million in new cash from a stock sale last week. Long story short ... if you're going to invest in Virgin Galactic stock, you're going to have to be very patient before you see your first profit.
