Virgin Galactic Stock: About To Take Off (NYSE:SPCE)

Virgin Galactic (NYSE:SPCE) is one of the leading space tourism companies, which aims to eventually take individuals into orbit and then on to destinations in our immediate vicinity and later to other planets. While the price tag on these exclude most of the world’s population, for now, Virgin Galactic has been leading the pack at more affordable joy rides at ‘just’ a few hundred thousand dollars versus millions at others like Jeff Bezos’s (AMZN) Blue Origin and Elon Musk’s SpaceX (SPACE).

After experiencing some major delays and skepticism from leading market analysts for the longest time, the company is maintaining their schedule to begin their near-final tests flights in the first half of 2023, after it being pushed back several times.

This is the crossroads the title speaks of. The company has enormous potential given the near $12 billion market size the space tourism industry is expected to reach by just 2030 and the $1 trillion in revenues it’s expected to generate by 2040, but also faces stiff competitive pressures and other headwinds as it gears to launch its first orbit flights.

With this potential, I believe that Virgin Galactic, if able to overcome their headwinds, can be valued at more than 50x what it is today over the next 15 to 20 years, which can present a superb long term investment opportunity which is nearly certain to beat the broader market returns. Let’s explore the ups and downs which I believe the industry and Virgin Galactic will face.

The Pro: Exponential Growth

The growth of the industry is aggressive. Every year, when analysts of various firms update their projections for the industry, the CAGR (compound annual growth rate) increases and the value of the space tourism industry increases.

Over the course of the past couple of years, industry experts and analysts have been projecting that the industry would grow at various rates, but as those years have come and gone and more and more investments are made into the industry – those projections are increasing.

A UBS (UBS) report from 2020 forecasted that the space tourism industry, both orbital and suborbital, will amount to a market size of around $3 billion. As I’ve linked above, this industry is now projected to reach over $12 billion by 2031 due to advancements in the field.

While these advancements have made it easier and safer to achieve these flights and experiences, the most important factor is that back in 2020 the average price per flight was in the millions and is now down to a few hundred thousand US dollars. While this is by no means accessible to a majority of any population on earth, it broadens the pool of potential individuals who will be paying for these experiences.

But that’s what’s expected to drive the long term growth, with Citi (C) projecting that the space tourism industry will reach $1 trillion in revenues by 2040. That presents an amazing opportunity for Virgin Galactic, as they remain one of the largest players in the industry.

It’s noteworthy that industry prospects, as I’ve mentioned earlier, have been changing for the better each and every quarter for the past several years, which means that I believe we’re likely to see higher estimated revenues by 2040 than the $1 trillion mark which was estimated by Citi market research.

Other Main Headwind: Competition

Right now, companies like SpaceX, Blue Origin and others have been working overtime, with the backing of massive companies behind their respective leaders, to accelerate the timeline for space tourism and commercial venturing as well as lower the overall pricing in order to attract more folks.

This means that while the industry is in its relative infancy, there are going to be multiple options for the relatively low pool of individuals who can and then will spend hundreds of thousands of dollars for space flight. Having multiple companies, as well as more well-known ones, for Virgin Galactic to compete with is going to be rough.

Even so, the company has the opportunity to pick up a good amount of market share moving forward and as a result, potentially, be worth a lot of money someday. While this is my main take from my research on Virgin Galactic, competitive pressures are worth keeping an eye out for. Furthermore, a company like SpaceX, which generates tens or hundreds of millions of dollars from commercial and government space operations, can use that to subsidize some of its operations and, as a result, can lower the price points for flights.

Another potential headwinds worth noting is that, as with many new industries, an emphasis on safety is paramount. This means that even the slightest malfunction in any system is almost certainly going to cause national and international headlines and cause hesitation amongst those who would otherwise be keen on exploring orbit and suborbital space tourism.

Share Price Potential Is Huge

While the risks with Virgin Galactic are quite something, the return is also. I continue to hold that the company can hold somewhere around 3% to 8% of the market share by 2040, given the advancements that the companies which are currently in the industry are making and the industry’s relatively high barrier of entry for new players.

With a projected $1 trillion in revenues by 2040, that would mean that the company has the potential to generate an average of around $50 billion a year. Even with a 1x price to sales multiple projects the company’s fair value at around $50 billion, about 50x what it is worth right now, with the company’s market capitalization sitting just below the $1 billion mark.

Given the roughly 15 year time frame, that means that the company’s value is projected to grow at a compound annual growth rate of just over 24% annually over the time period, which I believe will easily outperform the broader market return over that time period.

Conclusion: Risky, But Worth It

An encouraging thing about the company’s near-term prospects is that they’ve been beating their projected earnings per share over the past few quarters, and since then they have seen additional downgrades. They have over $1 billion of cash and equivalents and are burning through roughly $400 million in free cash flow a year (negative free cash flow) to fund operations.

When it comes to the short term price action, I believe that with them sticking to their timeline for testing their rockets and making it ‘tourist’ ready, their share price headwinds, which saw a nearly 60% reduction over the past few quarters, are likely to end and that now is a good position to either initiate a new position in the company or add to an existing one, as I am doing.

With profitability currently expected for 2028, it’s clear that they’ll need another capital raise at some point and that competitive pressures do exist, but the return potential on an industry which is no longer theoretical is worth it, in my opinion.

I am increasingly bullish on the company’s long term prospects and will be adding to my existing long position through direct stock purchases.