Why Virgin Galactic is spending $700 million on new spaceships

Well, Galactic 01 is in the record books – and it’s been a fantastic success Virgo galaxy (SPCE -8.27%).

Departing Spaceport America in New Mexico just after 11 a.m. ET Thursday, Virgin MotherShip Eve climbed up and launched the Virgin SpaceShip Unity at 11:33 a.m. ET, allowing the latter to ignite its engine and blast its way to the edge of space, along with three employees. of Virgin Galactic and three passengers from the Italian Air Force on board.

It is important to emphasize this: paying off Italian Air Force passengers.

When Unity touched down at Spaceport America 16 minutes later, Virgin Galactic finished its first-ever revenue-generating commercial space tourism flight, ushering in an era when not one (Blue Origin) but two aerospace companies (Blue and Virgin) now served. Paid tourist trips to space and back.

Virgin Galactic math problem

Of course, it remains to be seen whether Virgin Galactic (or Blue Origin for that matter) can turn a profit from this new type of tourism business.

As I explained earlier, Virgin Galactic can currently only carry a maximum of six passengers per space tourism flight. With a cost of no more than $250,000, and a flying cadence no more than once a month (Virgin says they’ll hit that cadence in August, by the way), which only works out to about $1.5 million a month in revenue for the Virgo galaxy.

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That’s not a lot of revenue to support a company that currently has operating costs of about $500 million a year, $125 million a quarter, or more than $40 million a month. In order to offset the higher costs of building a space tourism company, Virgin Galactic simply must accelerate the number of flights it can make each month, quarter and year.

Therefore, Virgin Galactic will need more spaceplanes. Virgin Galactic says each of these new spaceplanes will cost $50 to $60 million to build.

Where will Virgin Galactic find the money?

Fortunately for Virgin Galactic, it has a solution to this problem, and (perhaps unfortunately for investors) it comes in the form of selling more shares.

Last week, Virgin Galactic announced that in order to raise the funds needed to build a fleet of the multiple new “delta-class” spaceplanes it needs, it is selling stock — and plans to sell more. According to the company, Virgin Galactic raised $300 million by selling nearly 60 million shares over the past 10 months. The company indicated that it plans to sell another $400 million worth of shares in the future.

At the company’s current share price of about $4.25, that works out to about 94 million additional shares coming in the block. Keep in mind that at the end of 2021, for example, Virgin Galactic only had about 258 million shares outstanding (according to data from S&P Global Market Intelligence). This means that very soon, more than one in three Virgin Galactic shares will be a “new” stake in Virgin Galactic, largely built and sold to raise the funds needed to build its new fleet of Delta-class spaceplanes.

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Will the money be enough?

Now, that might sound bad. The more new shares Virgin Galactic issues and sells, the more slices are cut into Virgin Galactic’s “pie” – and the smaller the slices are left for anyone who bought into the shares before the dilution occurred.

But there is good news here as well as bad news.

By my calculations, Virgin Galactic needs to build at least eight new Delta-class spaceplanes, each capable of flying once a week, in order for it to have a chance to generate enough revenue to offset its operating costs. $50 million to $60 million each — let’s say $55 million average cost — so it would cost Virgin Galactic $440 million to build the fleet it needs to become profitable.

The good news, then, is that the $300m Virgin Galactic has just finished raising, plus another $400m it hopes to raise, should easily cover that construction cost – and leave $260m to cover losses the company incurs while it’s in operation. . build its fleet.

Added to the $830 million or so that Virgin Galactic has in the bank, and revenue coming from spaceflight with Unity, this could Have enough money to keep Virgin Galactic in business until the middle of 2025, or (if Virgin Galactic finds a way to cut costs even as it ramps up operations) until the beginning of 2026, when the first Delta-class spaceplanes are expected to start arriving.

It will be very close, though. Personally, if I were a Virgin Galactic investor, I would have expected that there would be a need to sell at least hundreds of millions of dollars more shares, sometime in the next couple of years, to bridge the gap and move the remaining Virgin Galactic shares out of the way to profitability.

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My advice: If you’re going to invest in stocks, keep this in mind, and expect more dilution.

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