To The Moon

Since mylast pieceon Virgin Galactic Holdings, Inc. (NYSE:SPCE), management has raised $425m via a 2027 convertible note, delayed commercial launch by one quarter (now Q1 2023), and the valuation has essentially capitulated downto $1.6B.

Virgin Galactic now has 800 deposits, with roughly 200 of those tickets being sold at the higher ticket price of $450,000. Therefore, Virgin Galactic could have a rough backlog of around $240M (very rough guess).

There are 8 analysts providing revenue estimates for FY24. With the $100M revenue difference in FY24, analysts clearly don't believe a 3x monthly flight capacity is realistic, and neither do I. This demonstrates the difficulty in forecasting SPCE, as there is no concrete evidence to suggest they can achieve their estimated flight rate.

The benefit SpaceX has in testing is that they can test unmanned spacecraft where the risk to human life is almost zero. Virgin Galactic doesn't have this luxury, which is why there have only been three space flights thus far.

Pre-flight testing and inspection for Eve are significantly shorter than it is for Unity which can be up to several weeks. Furthermore, how is management providing estimates when the number of man-hours to complete post/pre-fight inspections/testing on the spacecraft are unknown. After each flight, there will be a visual inspection of the spacecraft's wing, feather, body, landing gear, etc., to examine the stress points on the spacecraft. Other than running simulations, it's hard to know how the composite material will hold up after 10, 20, 40 flights.

I struggle to believe Virgin Galactic can go from three spaceflights over the course of three years to a one-month cadence for Unity.

As we progress through the quarters in 2023, I think we are going to see the true flight capacity of Virgin Galactic's fleet. I already suspect Unity's estimated 1x/month could go down to 0.75x/month or 0.5x/month. This massively changes the earnings outlook and prevents visibility for analysts, which is why the spread between Wall Street's 12-month price target is so large, $5 low-end and $16 high-end.

In my last article, I discussed how a trade could present itself going into summer of 2022 in anticipation of the first commercial flight later in the year. Although I do not trade, I can understand why a trader might consider an opportunity to go long if we see a Fed put (or pivot to infrequent hikes).

Particularly if the number of shares sold short increases over 2022. As of the 30th of April,50 million sharesare shorted (24% of float). If the selloff continues (while more shorts adding) and we see a Fed put towards the end of 2022 or after the summer, it could lead to a volatility spike forcing newer shorts to cover their short position.

However, for investors, it's best to stay clear due to the inability to trust management and measure Virgin Galactic's potential IRR with any level of confidence. Considering the chart below (I know this can change), this is not the environment to hold growth stocks unless you can buy into growth with a significant margin of safety.