Virgin Galactic Can’t Hype Away Lousy Math

Stocks to sell

Virgin Galactic (NYSE:SPCE) seems to be in the business of making news. For example, the company is pointing to increased demand for space travel even though they still seem years away from putting those individuals in flight. However, that doesn’t seem to be deterring investors from buying SPCE stock. In fact, the stock is up over 30% in 2020.

Virgin Galactic Can’t Hype Away Lousy Math

Source: Tun Pichitanon / Shutterstock.com

But it hasn’t been a smooth ride. In fact, after soaring above $30 per share in February, SPCE stock gave up that gain and briefly turned negative for the year. It’s since come back, but I suspect that may be due to the increased activity of day traders.

However, the stock recently got a nice boost as the company announced a partnership with NASA to help train astronauts for voyages to the International Space Station. There is enthusiasm that this could be part of the company taking a larger role in getting civilian missions ready.

The partnership also includes an agreement for the two entities to work together toward the development of high-speed travel technologies. This is somewhat intriguing, because NASA has one of the smaller budgets as a percentage of the federal budget. Yet their overall budget has been steadily increasing.

But none of this seems to solve the issue of a company that is bleeding money now.

The Business Model Remains Murky

Something about SPCE reminds me of Jurassic Park without the ethical questions. Ultimately, the company’s One Small Step program seems like a theme park ride for our highest income individuals. Case in point, some of the program’s initial customers include celebrities such as Justin Bieber and Leonardo DiCaprio.

I’m not making a value judgment about the company’s ambitions. I think it’s a cool idea and as someone who loves a good roller coaster, I think it might be fun to experience weightlessness for a minute or two.

But ultimately, SPCE is selling an experience. And it’s an experience that will only be available to a select group of individuals. I know this because the company has made the deals it has with NASA. It knows that it has to have a revenue stream that goes beyond their suborbital flights.

Mark Hake broke down the math problem that SPCE faces:

If the company’s break-even cash flow number is $60 million per quarter, it will need over 240 people every quarter. In other words, 240 people paying $250,000 every quarter will only keep the company’s cash flow at break-even levels.

One of These Stocks Is Not Like the Other

I recently wrote about the promise of Crispr Therapeutics (NASDAQ:CRSP). This is a company that is on the vanguard of gene-editing therapy. The company is not yet profitable. It has not yet brought a candidate to market. It may be years before either of those realities happen.

And yet, I find the stock compelling. It’s a stock that reflects a world of hope that begins to deliver on the promise of genetics. We can easily imagine that if Crispr can deliver a treatment for sickle cell anemia soon, can it be too much longer before it will be able to eradicate some forms of cancer? I’m not making a claim. I’m just saying it’s a future we can imagine.

But I also cautioned investors that they should invest in this stock before it starts to deliver on its promise. Because once it does, the easy gains will already be gone.

Then there’s SPCE. This is a company that’s on the leading edge of another futuristic technology. They are also not yet profitable. And although they do have a product to offer, it still seems like it’s going to be several years before it may be commercially viable.

But in the case of SPCE stock. I don’t find the stock all that compelling. We can’t really imagine a universal benefit where average Americans can take a trip to suborbital space. And the company acknowledges that it’s difficult to find enough high net worth individuals that are willing to pay at least $200,000 for a suborbital flight.

You Can Wait on SPCE Stock

And so, I caution investors that they shouldn’t invest in SPCE stock until it begins to deliver on its promise. My InvestorPlace colleague Dana Blankenhorn summed it up well in offering his take on SPCE stock:

Its system works in theory. The company has done some test flights. But until there are real flights, with paying passengers, it’s all a guess.

Without a proven model that will help it make money, the stock isn’t going to the moon anytime soon.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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