Virgin Galactic Stock: Ignore The Downgrades; Strong Buy (SPCE)

Virgin Galactic (NYSE:SPCE), one of the leading space flight companies in the world, has seen its share price come under immense pressures as of late as a result of some operational setbacks, competitive pressures and subsequent analyst downgrades.

Investment banks came in droves after the company announced it was pushing back its first commercial space flight from the first quarter of 2023 to the second quarter, downgrading the stock to a “sell” rating. This, alongside the actual operation setback, has resulted in the company’s share price closing at its lowest since the company’s IPO.

But there has been little change to the company fundamentals. They are on track for their first commercial flights in the second half of 2023, they’ve been selling tickets at a consistent rate due to their lower price point than competitors and they’ve solved some short-term solvency issues.

While the company may be facing an operational setback, it doesn’t mean they’re never going to perform these flights, and with a training and testing casualty and error rate lower than competitors – I believe they represent a fantastic long-term investment opportunity at current levels.

Let’s dive in.

Why Virgin Galactic?

As I’ve mentioned before, the company has been facing some operational setbacks which they intend to resolve in the coming year. On the flip side though, there are several positive factors I believe will propel them into the future. Let’s explore those.

1 – Existing Demand

The company has sold over 800 tickets so far for future flights, and it only recognized about a third of that revenue – $104 million. That means that the company has over $210 million in future revenue pending (page 31) as it gears up its space flights in the second half of 2023.

The company recently upped the price of a ticket from around $250,000 to $450,000, which includes a down payment (recognized revenues) of $150,000 of which $25,000 is non-refundable in case the customer backs out or the flight gets cancelled for whatever reason.

This has driven the company to take in more orders than competitors like Jeff Bezos’s Blue Origin (AMZN) and others, since their price point is lower. This brings us to the next point of why Virgin Galactic.

2 – Lower Price Point

Virgin Galactic’s price point of $450,000 isn’t exactly affordable for everyday people, but it’s still a hell of a lot cheaper than what we currently know about the company’s competitors.

For a single ticket aboard Bezos’s Blue Origin flight, the CEO of a Blockchain company ended up paying about $28 million and Amazon’s founder Jeff Bezos said last year that the company received about $100 million in future ticket orders. Even at that point in time – Virgin Galactic eclipsed that with 600 tickets valued at $150 million based on their previous $250,000 ticket price.

There’s a reason why I think this outperformance will continue, as well.

3 – Safety Concerns

The company did suffer a catastrophic accident in 2014, when an error by a co-pilot caused their experimental ship to crash, killing one pilot and severely injuring the other. Since then, the company has taken extraordinary measures to make sure that all safety concerns are met and that rigorous testing is performed in all elements of space flight to ensure the safety of their crews.

On the other hand, Blue Origin, the company’s main competitor, suffered a booster rocket error just about a month ago, as well as other companies like SpaceX (SPACE) experiencing major and minor malfunctions. While in the grand scheme of things, these tests have been far more safe than getting into your own automobile, the perception of safety is critical for the long-term success of these companies.

As we’ve seen with space exploration in general – even a minor accident gets broadcasted all over the world and dissuades future passengers from signing on and buying tickets. Therefore, it’s critical for these companies to make sure that their product is thoroughly tested and scrutinized, and I believe that currently – Virgin Galactic is winning that safety race.

Projecting Grandeur

Right now, the company is aiming at performing roughly 400 flights a year with their existing infrastructure and flight capabilities. This means that if the company makes its first commercial flight in the second quarter of next year, they’d likely complete all of their currently pending 800 flight orders by the third quarter of 2025.

This means 2 things. First, they are set to realize about $212 million in new revenues, as stated by the company in their most recent report filing. Second, they are likely to see a surge in orders as they become operational. Here’s where my projections greatly differ from current expectations.

Current Expectations – Meh…

Currently, analysts project that the company will report about $222 million in sales through the end of 2025, with the following breakdown:

	2022	2023	2024	2025
Sales	$1.25 million	$26.5 million	$84.1 million	$112 million

Click to enlarge

(Source: Earning Projections – Seeking Alpha Aggregator)

This means that throughout 2025, where I believe the company will be able to have more than 650 flights under its belt, they will just barely recognize the revenue which they are due upon completion of the 800 pending space flights. This doesn’t make a whole lot of sense.

My Expectations – Youza!

My expectations may seem rosy, but hear me out. There are 2 ways which I believe will contribute to the company easily outperforming expectations:

1 – While I believe that the company may make around 600 flights, they are likely to realize about $150 million of the $212 million they say is currently pending for completion of the flights. However you divide this across the 2.5-year time period, it’s likely to be realized in an increasing form through 2025.

2 – As of the first ever commercial flight, pending its success (or failure), I believe that the company can see as many as 1,500 additional ticket purchases throughout 2025, and that’s a conservative estimate. This means that with the down payment of $150,000, an additional $225 million will be realized instantly as they book the tickets with the upcoming revenues surging from $62 million to $512 million by the end of 2025.

Why These Estimates Are Conservative

According to general surveys, around 45% of Americans are interested in space exploration in their lifetimes. However, given that the price ticket is unlikely to come below the current $450,000 any time soon – it means that only a select few relative to the general population will be taking them.

According to market research, there are about 62.5M people in the world who are millionaires. While this doesn’t mean they can all afford a $450,000 ticket, I do believe that about 10% of them can – resulting in 625,000 potential sales.

If we then project that 45% of those are interested in space exploration, that gives us 281,500 people which can conceivably buy a ticket for this still-exclusive ability. As you’ve noticed, my projection of a mere 1,500 sign ups through 2025 is severely conservative and represents a tiny 0.5% of the “eligible” population.

Therefore, it is conceivable that we may see around 5% of those sign up through 2030, which means that the company will realize $2.1 billion in revenues with another $4.2 billion in revenues payable after flight completion.

Current projections by a small number of analysts call for just $3 billion.

Risk Discussion – It’s Serious

The most obvious risk to this entire thesis, and one that investors or potential investors will need to take into account is that we may see an accident even before the company launches their first commercial flight next year. In an even worse case, they can have an accident on their first flight.

This will, without a shadow of a doubt, cast a thick fog on not only the company’s future but on the future of commercial space flight as a whole and can set it back years, resulting in investors holding on to nearly worthless stock until any of that materializes.

Another risk factor if the company’s competitors. While Blue Origin and SpaceX pose an immediate threat, the industry is expecting to grow rapidly and there are several companies with more cash than they know what to do with, as well as other aviation companies which may enter the market in order to diversify their existing revenue streams.

Investment Conclusion

While we don’t have enough to estimate what the company’s profitability is going to be at any point in time until some of the first launches and financial reporting – I do believe that current expectations are extremely conservative.

Current projections, which as I discussed earlier – remain conservative, call for the company to grow sales at a 20% to 50% clip from 2025 through 2030. But based on these expectations, the company will be trading at a price to sales ratio of about 1x, which is severely undervalued relative to other industries which are expected to grow that fast.

Due to these factors, I continue to believe that the company will easily outperform expectations and should be currently valued at about double what it is right now. Furthermore, at a 50% growth rate per year, I believe that they will easily outperform the broader market and constitute a superior long-term investment.

I remain highly bullish on Virgin Galactic and will continue to accumulate shares as the company’s share price remains at these levels.