Virgin Galactic (NYSE: SPCE) just launched another successful test, putting many investors growing concerns somewhat at ease. However, as commercial flights continue to get pushed back and losses mount, the big question of how Virgin Galactic makes money remains fresh on our minds.
A 2020 survey found that four in ten people with a net worth of over $5 million would be interested in buying a ticket. This means there is a total addressable market of approximately 2.4 million people, but how does Virgin Galactic plan to profit?
Virgin Galactic aims to primarily make money by bringing tourists to space to experience zero-gravity. As of the end of 2020, the company had over 600 customers signed up with a further 700 refundable deposits signed up in more recent times with the "One Small Step" initiative. Management has stated that there are very few requested refunds on deposits, possibly due to the net worth of its client base. This demand is likely to create a backlog of bookings for the first few years of service.
Space Tourism is not Virgin Galactic's sole venture and is planning to use its "proprietary technologies and capabilities for other commercial and governmental uses,". These other uses include point-to-point supersonic travel, and Virgin Galactic has unveiled a concept design for its Mach 3 aircraft. It has teamed up with engine maker Rolls-Royce to collaborate on this project.
It has also entered into a "Space Act Agreement" with NASA's Johnson Space Center to facilitate commercial participation to the International space station. These expeditions could range from private to scientific research and is another lucrative opportunity for the company.
Virgin Galactic had no revenue in either of the past two quarters and reported a net loss of $55.9 million in Q1 of 2021, down slightly from the $59.5 million loss in Q4 2020. However, this is likely to change dramatically when commercial services begin in the next year. Tickets are in the price range of $200,000 - $250,0000, and select flights may be priced even higher which will bring in millions in revenue.
Virgin Galactic plans to have three flight-ready spaceships by the end of 2021, with three more test flights to go before commercial rips can begin. It hopes to have five spaceships and operate 270 flights a year by its fourth year of commercial operations, which is projected to take in $590 million in revenue, while gross profit will stabilize at approximately 70%. There is further upside opportunity if Virgin Galactic manages to reduce ticket prices as this would create increased demand.
According to Morgan Stanley, hypersonic travel is set to be valued at $800 billion by 2040. Although this is a long way off, it appears to be the future of travel, and if Virgin Galactic can capture a portion of this market, it will generate significant revenue.
It remains unclear the projected revenue from Virgin Galactic's other ventures, but if the current plans are executed there is significant upside for the company. The current cash position is strong, with $617 million in cash and cash equivalents on the balance sheet as of March 31.
Last year's departure of George Whitesides from CEO to Chief Space Office and his role being filled by former Disney executive Michael Colglazier was significant. This marks a transitionary period for the company after over ten years of the development phase and into a commercial stage. Colglazier's expertise in delivering a luxury experience safely will be of added value to the team at Virgin Galactic. Whitesides will continue to focus on the development aspect of Virgin Galactic's business.
Virgin Galactic ambitions don't stop at just bringing tourists to space but disrupting the traditional aviation industry as well. Continued concept design and development on the Mach 3 aircraft is its first step in point-to-point travel. It appears that it will be years down the line before this will be in commercial use as it is in the early stages.
Virgin Galactic is an exciting investment in a new era for commercial travel. However, you should only invest if you have a high appetite for risk.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
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