Virgin Galactic has serious potential, however only time will tell!

Most of you are already aware of a promising, hyper-growth stock that goes by $SPCE – Virgin Galactic, and if you have not yet heard of it, you are in for a treat. The purpose of this analysis is to inform you about all of the ins and outs of Virgin Galactic, so that you can be confident and informed, think of it as doing your own Due Diligence. If you would like to stay up to date with my other analyses of the top growth stocks in 2021, similar to $SPCE – Virgin Galactic, then follow me here.

Company Overview:

Here is a Statement from SPCE’s 10-K filing that explains their mission and business, “We are a vertically-integrated aerospace company pioneering human spaceflight for private individuals and researchers, as well as a manufacturer of advanced air and space vehicles. Using our proprietary and reusable technologies and supported by a distinctive, Virgin-branded customer experience, we are developing a spaceflight system designed to offer customers, whom we refer to as "future astronauts," a unique, multi-day, transformative experience. This culminates in a spaceflight that includes views of Earth from space and several minutes of weightlessness that will launch from Spaceport America, New Mexico. We believe that one of the most exciting and significant opportunities of our time lies in the commercial exploration of space and the development of technology that will change the way we travel across the globe in the future. Together we are opening access to space to change the world for good.”

Virgin Galactic is an Aerospace company that is among the first to enter into the commercial space flight industry. Virgin Galactic believes in the massive potential of space exploitation and monetization of commercial space flight and is positioning themselves to be a leader in the space (pun intended). The market for commercial space flight is a new concept that is yet to be explored, however there are a few other companies that are trying to break into this industry as well (ie. $LMT - Lockheed Martin).

In the history of mankind, there have only been 581 humans to ever explore space. However, all of these people have been handpicked by governmental space agencies and have been trained for many years. Virgin Galactic is trying to change this and make space flight available to high net-worth individuals (at the moment) so that these seemingly regular people have the chance to do something extraordinary and explore what space has to offer.

Thus far, Virgin Galactic has $80M in deposits from over 600 people, who are interested in using Virgin Galactic as a vehicle to explore space. Virgin Galactic is expecting to receive their last FAA approval needed to fly their customers in their aircrafts.

Investment Information:

Commercial Space Flight Industry:

Over the past decade, space flight has been innovated consistently, through rapidly advancing technologies, decreasing costs, and greater access to capital for private space flight companies/organizations. Many governments have taken a hands-off approach to space flight and funded private companies who compete for contracts and are forced to be constantly innovating in order to win these contracts. This competition has resulted in technologies that greatly reduce the waste, emissions, and cost of space travel.

Virgin Galactic has been able to incorporate the best innovations in space flight into their aircrafts to create a reusable rocket that increases launch consistency, number of launches, and decreases the cost of space exploration.

Lastly, Virgin Galactic is exploring certain strategic relationships in order to advance their technologies, identify new applications, accelerate their progress, and enhance their growth as a company.

Financial Information:

Financial Performance (Good): Virgin Galactic increased their R&D expenses by 19% YoY, although this is considered a cost, it is necessary for their business to spend on R&D, and I believe the improvements in technology derived from R&D spending will be considered an asset in the future.
Financial Performance (Bad): In 2020, Virgin Galactic’s revenues decreased by 93.7%, their gross profit decreased by 96.34%, their net loss increased by 199.79%, and their net margin decreased from 47% to 27%. This is due to the fact that the US government decreased their engineering service budget, having adverse effects on Virgin Galactic’s business.
Liquidity Position: Virgin Galactic currently has a cash position of $665.9M (and an additional $13M of restricted cash). Having this many cash should help Virgin Galactic to weather the storm in the meantime until the eventually are able to have a positive net income.
Stock-Based Compensation: Virgin Galactic’s board of directors, along with the shareholders adopted the 2019 Incentive Award Plan, which reserved 21.21M common shares to be awarded to employees, consultants, and directors. If these shares were to be distributed evenly over the next 3 years, there would be dilutionary effects of 2.85%/year.
Director Compensation Table: Virgin Galactic awards members on their board with stock awards, in 2020, Virgin Galactic gave out awards of $124,994 to 4 board members, totalling $500k of stock compensation. In Virgin Galactic’s 10-K report they stated that this compensation resulted in a total of 99,465 shares distributed to these members. This would cause share dilution of around 0.04% which is essentially negligible.
Anniversary Awards: Virgin galactic also gave out some “anniversary awards” to some of their highest-ranking employees, to recognize their ongoing service. In 2020, they gave out 931,93 common shares to 4 of their longest-standing, high-ranking employees, this would cause share dilution of 0.4%, although this dilution is not a large figure it still adds up over time.
Colglazier Awards: In 2020, Virgin Galactic awarded their CEO – Michael Colglazier with a maximum of 1,070,000 in monthly installments over 60 months. This represents 214,000 shares being distributed to him every year, which would have a dilutionary effect of 0.09%/year.
Palermo Awards: Furthermore, in 2020, Virgin Galactic also awarded their COO, Enrico Palermo with a maximum of 200,828 shares, however upon retirement he only decided to take 25% (50,207 shares), which would cause a dilution of existing shares of 0.02%.
Exercisable Options: Currently, there are 717,603 underlying shares in options that are exercisable. If all of these options are exercised there will be dilutionary effects of around 0.3%, although this is not much it adds up.

Virgin Galactic’s Strategy:

Virgin Galactic plans to use their proprietary and reusable flight system to seek to provide affordable, safe, reliable, and regular transportation to space for their customers. Virgin Galactic has highlighted a few ways in which they intend to achieve this:

Commercial program for Human Spaceflight: Virgin Galactic is in their final stages of readying their commercial spaceflight program and has been vigorously testing their VSS Unity Spaceship. Currently, they are happy with the performance and are completing the final touches, like adding a cabin interior, before they prepare their first future astronauts for space.
Expanding their Fleet of Rockets: Virgin Galactic plans to build more of their VSS Unity Rockets to expand their fleet of vehicles. Furthermore, they are working on building two SpaceShip III vehicles. By creating these vehicles, Virgin Galactic is hoping to increase their annual flight rate, which will help them to maximize their revenues.
Lowering Costs: Virgin Galactic is constantly looking for ways to improve their manufacturing and operating efficiency in order to decrease their total cost per spaceship. Furthermore, as they continue to manufacture additional spaceships and improve their technology, they believe that their costs will decrease smoothly over time.
Leverage their Proprietary Technology: Virgin Galactic intends to continue to expand on their proprietary technologies to pursue growth opportunities and enter into agreements with other government organizations for the use of their ships.

Management Team:

It is very important to look at the credentials of the management team, especially when looking at high growth stocks that have mainstream hype. Furthermore, this is increasingly important when looking at SPACs, or companies who previously were listed publicly via SPAC (like Virgin Galactic). By looking at the management team you get an idea of their experience and expertise in the field, which helps to validate the company and decrease the chances of a scam. (A great example of a SPAC with an awful management team is $NKLA - Nikola and look at what happened to them).

Virgin Galactic’s CEO was formerly the Chief of Staff at NASA and was the Space Shuttle Launch Integration Manager at NASA as well.

Virgin Galactic’s President of Aerospace Systems has 20 years of experience in aerospace, defense, and cyber security industries.

Virgin Galactic’s VP of Engineering had 40 years of experience working under Lockheed Martin.

Virgin Galactic’s team of pilots has 269 years of combined flight experience with organizations like NASA, RCAF, RAF, US Air Force, and the US Marine Corps.

Furthermore, there are many distinguished members on Virgin Galactics Space Advisory board including former NASA Chief of Staff George Whitesides, and former astronauts Sandy Magnus and Chris Hadfield.

I think that this management team is well-rounded, and very experienced. This is very good to see in a business as technical as Virgin Galactic’s and it shows me the legitimacy of their business and their future potential. Furthermore, there is no doubt in my mind that this is a legitimate company who is making serious efforts to change space travel for all of mankind.

Competitors:

Virgin Galactic has competition both in the private space, and in the public markets. Virgin Galactic’s private competition provides more of a threat to their operations/business, so I decided to include them. However, Virgin Galactic’s public competitors are not as big of a threat, but I have to include them in this section because of the comparable analysis that is later to come.

Virgin Galactic’s private competitors include Space X, and Blue Origin, both of these companies (namely Space X) have made tremendous strides in the space travel industry and have made several advancements that have made space travel easier to access.

Virgin Galactic’s public competitors, are companies that operate similarly to Virgin Galactic, have similar goals for their business, and are listed on the public markets. These companies include The Boeing Company ($BA), Lockheed Martin Corp. ($LMT), Aerojet RocketDyne Holdings Inc. ($AJRD), and Spirit AeroSystems Holdings Inc. ($SPR). These companies will be seen again in the comparable analysis, where I will compare the financial ratios and multiples of Virgin Galactic to that of these competitors.

Investment Valuation:

The only way in which I could value Virgin Galactic is via comparable analyses. Furthermore, since there were only 3 multiple and/or ratios that exhibited a positive number, I had to choose to compare those ratios/multiples. The ratios/multiples that I chose were P/B, PEG, and EV/Assets.

P/B:

By comparing Virgin Galactic’s P/B ratio against their public competitors (listed above in the “competitors” section of this report) I arrived at a fair value per share of $SPCE of $25.73, which implies a downside risk of 29.24%.

EV/Assets:

By comparing Virgin Galactic’s EV/Assets multiple to that of their public competitors, I arrived at an implied downside of 69.17%, or a share price of $11.21.

PEG:

The last ratio that I examined was the PEG, which implied an upside of 14.99% to a share price of $41.81.

Average Comparable:

In order to arrive at an unbiased valuation, I decided to take the average of the 3 results that I arrived at through my comparable analyses. By doing this, I got an all-encompassing fair value of $26.25/share, which would imply a downside risk of 27.80%.

I do not think that this is the be all and end all for valuing $SPCE, because in this analysis I compared their ratios/multiples to other companies that were already more mature and were not solely focused on commercial space flight. An example of this is Boeing. Boeing has plans for space travel, however their business is generated through the sale of airplanes, this is vastly different from Virgin Galactic so the comparable does not make the most sense. So, although Virgin Galactic is not an undervalued stock today, they may be in the future when they make their own revenues.

However, I do think that this valuation implies that current and potential investors should be aware of the risk and potential downside of this investment, however wherever there is risk, there is reward, and the reward for this investment could be astronomical (once again pun intended).

Risks:

Share Dilution: Virgin Galactic has a lot of programs, and awards that incentivize their employees, and directors through stock compensation. These programs/awards include stock-based compensation, director compensation table, anniversary awards, Colglazier awards, Palermo awards, and exercisable option awards. By grouping all of this dilution into one figure, we arrive at a maximum dilution for the year 2020 to be 3.68%. This is a large number and should be considered by new and existing shareholders alike. However, this is a high growth potential investment, so it is not uncommon to have higher figures of dilution.
Financial Performance: Virgin Galactic’s financial performance in 2020 was very poor, however it was due to the loss of contractual revenue from the US government. In the grand scheme of things, Virgin Galactic will not be relying on the US Government for the majority of their revenues, so it should not scare away investors from the bigger picture revenues for Virgin Galactic.

Catalysts:

FAA Approval: If Virgin Galactic can get their last 2 approvals from the FAA, they can start to take their commercial space flight business seriously and start to generate their own revenues. Once they start generating their own revenues, they should be able to turn a profit and work towards overall profitability of the business.
Successful Flights: If Virgin Galactic can continue to have successful trials and flights, their reputation as a commercial space travel business will be solidified. This is especially important during the early stages of their business because trust is everything.