A US penny stock is generally defined as one that has a low market-cap and trading below $1 per share.
After plummeting 95% in three years, Virgin Galactic (NYSE: SPCE) shares now cost just $0.88 (70p) each. This means the firm’s market-cap has collapsed to just $361m, down from $12bn at the height of the meme stock mania in 2021.
Given that a company must have a market-cap of at least $14.5bn or so to be included in the S&P 500, I think we can agree that $361m is low across the pond.
Billionaire Richard Branson founded space tourism company Virgin Galactic in 2014. It aims to regularly take paying customers to the edge of space aboard its rocket-powered spaceplanes.
Now, Branson ruled out putting any more money into the firm in December 2023. However, at the time, his Virgin Group still owned about 7.7% of the enterprise through its Virgin Investments arm.
Is the stock worth me investing in now after its almighty fall? Let’s explore.
Hibernation mode
The good news is that the firm has successfully completed 12 spaceflights so far. The flight window for the seventh commercial operation (‘Galactic 07’) opens on 8 June. This will carry four private astronauts, including a Axiom Space-affiliated researcher who will conduct multiple scientific experiments in suborbital space.
However, things then get a bit strange because that will largely be it for two years. Its main VSS Unity spacecraft will be retired. The firm will preserve what cash it has left to focus on building its next-generation Delta spaceships, which it says are on track for commercial service in 2026.
Delta class is designed to carry up to six passengers (rather than four), increasing the number of paying customers per flight. The firm also expects it to fly more frequently.
Heavy cash burn
Turning to the financials, we can see why this is happening. Last year, Virgin Galactic generated revenue of $7m, up from $2m the previous year. However, its net loss was $502m, and $500m in 2022.
It finished 2023 with $982m in cash and equivalents. But it’ll need most of that (if not more) to fund the Delta spacecraft R&D and rollout. Hence the cash-preserving hibernation mode.
Share dilution’s already been very heavy with the company raising $484m last year issuing 122.8m shares.
It’ll probably need more cash, suggesting further shareholder dilution. You don’t need an A-level in maths to see this is a sticky situation.
Would I buy the stock?
My worry here is that the new Arizona factory to make Delta spaceships isn’t even due to open until mid-2024. Then the spacecraft will have to be built before numerous safety checks and test flights take place.
Only then, assuming everything goes swimmingly, will customers be heading into space again.
I’m skeptical all that can be done in the next 24 months. Moreover, that’s around eight quarters, which is an eternity for a public company with almost zero revenue coming in.
In the absence of commercial catalysts, I imagine the stock will only drift sideways (at best) during this time. The worst case scenario is the company runs out of cash.
Given this, I’ll be investing my money in other less risky stocks.
