Alejandro graduated from Computer Engineering in Cuba and is passionate about technology. He covers cloud, IoT, electric vehicles and gaming related businesses.

2020-08-19 11:52

We are living on the dawn of a new era. An era where space travel will become a reality; a first and a necessary step towards space exploration and/or colonization. Virgin Galactic (NYSE: SPCE), is one of the hottest companies on this sector, moving over $15 million as average in the last 10 days. However, it has not been able to shake investors and analysts insecurities regarding its business model and short term future.

So, what's up with the fuzz?

Virgin Galactic, is part of Virgin Group, a conglomerate, created by Sir Richard Branson, that has successfully invigorated the travel industry over recent decades. It aims to provide Space Tourism at the cost of $250K per person per trip. The space portion would last no more than a few minutes; on which the 6 travelers (maximum capacity per trip) will get astonishing views of the Earth along with the zero gravity experience.

The company has been able to generate plenty of volume among traders, partially because of their unique concept for launch and partially because it is one of the few companies on Space Travel that are already publicly traded. Despite not posting any revenue yet, the company has steadily reported increase to their enrollment program for deposits towards future flights. They are also sitting on an $800 million pile of cash after securing financing by selling 23.6 million shares priced at $19.50 USD. This money should secure the company's future towards greener spreadsheets. The company is now expected to initiate commercial flights on 2021 and if their calculations are true they would be profitable no later than 2023. After all their Gross Margin is over 90%.

Why is there a cloud then over this Virgin Group subsidiary? Elon Musk's SpaceX and Bezos Blue Origin are not public yet however both companies have achieved significant results already, far more important than the test flies that Virgin Galactic has. Analysts are just not confident that their business model will beat the competition. It is also hard to imagine how can it be a healthy demand for such an exclusive price tag. Furthermore, the company recently announced a new supersonic jet design that is able to travel at Mach 3 (3 times the speed of sound). They expect to generate demand from high-end business clientele with the need for intercontinental flights; however there is a big black shadow over commercial supersonic flights after the Concorde disappointment.

Long time investment or short term bet?

Facing fearless competition from both, well established companies Lockheed Martin (NYSE: LMT) and Boeing (NYSE: BA), and from private companies (Musk's SpaceX and Bezos' Blue Origin),puts Virgin Galactic in survival mode. Yet the company has been able to generate healthy demand through their deposit program, proving that there is clear interest for this new industry. They now have to demonstrate that they can actually convert demand into bookings; same way they have to prove that the world is ready for a supersonic commercial jet. Even if this means a very hefty price tag. This leaves many unanswered questions: What is the path to profitability? How will they outsmart the competition? What will they do to secure demand?

For these reasons I do not believe in SPCE is suitable as a short-term investment and why I would not swing trade it. It feels more like a bet than an investment.

Now looking at it long term is different. They have a viable product, their balance sheet despite not being profitable looks solid, and they have the cash to keep growing and investing in R&D. Moreover, the newly appointed CEO, Michael Colglazier, did an amazing job running the Disney Parks division. This leaves Virgin Galactic in good hands and positioned to be a front-runner in a new industry that probably won't be a winner-takes-all. Specially after the COVID-19 cloud dissipates.

I do think the stock can and will skyrocket, but you have to invest for the long-run. Remember, short-term bets are riskier than long-term investments. As far as Virgin Galactic, I recommend viewing it from a Moon's eye perspective.