Don't Get Sucked Into SPCE Stock

Mark Hake

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Picture of Virgin Galactic rocketVirgin Galactic

Virgin Galactic (SPCE) stock is a mess. The stock peaked at $55.91 on June 25 and is now below $20 at $19.81 mid-day on Nov. 3.

Richard Branson's flight to space on July 11 was marred by a series of mishaps, as was reported by the New Yorker magazine shortly thereafter. The company is now being investigated by the FAA for deviating from its intended space flight plan in its last flight.

I wrote about the company's flight procedure problems earlier in Sept., but now it's clear that the company won't be flying again anytime soon. On Oct. 14, the company said that its commercial service would not begin until the fourth quarter of 2022.

In terms of the stock market, that is an eternity. The reason is the company is expected to continue to lose money and burn through cash.

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SPCE stockGoogle Finance

Cash Burn For the Next Year

This is clear from the company's Q2 earnings release which showed huge losses and is likely to be reinforced by its upcoming Nov. 8 Q3 earnings presentation.

Cash burn for the six months ending June 30 was $113.47 million. But its annual run-rate free cash flow (FCF) losses, based on the Q2, is negative $255 million. I described this in a recent article analyzing its losses.

Virgin Galactic recently raised $500 million and it has over $1.05 billion on its balance sheet. But that does not cover any losses it may have incurred in Q3.

Moreover, if the timeline slips from Q4 next year when commercial operations will start, the company could end up using a good portion of its remaining cash. For example, if it burns through $255 million over the next year, and the start of commercial operations slips two more quarters, that is a reduction of $383 million. In addition, it could take a year for the company to become cash flow positive, potentially draining another $150 million. That would lower its cash balance by $533 million to $517.5 million.

So analysts will be watching its Q3 earnings report very carefully to see where its cash burn could affect its outlook over the next year.

What To Do With SPCE Stock

At this point, you don't have to be in a rush to buy SPCE stock. A lot will depend on Virgin Galactic's outlook for the start of its commercial operations. In addition, analysts will be projecting out its cash burn.

On the one hand, it's important to have full information to make a rational investment. But on the other hand, contrarian investors typically don't wait for all the information. They make informed bets, gambles based on expected return.

And this is why SPCE stock could potentially be interesting. After all, the stock is near the bottom of its recent trading range. Contrarians like this kind of situation.

SPCE Stock's Scrap Value

But don't get sucked into this kind of thinking. The fact is there is nothing preventing Virgin Galactic from ever going into commercial operation. In other words, there is no fail-safe, other than the value of its cash per share.

What is the cash per share? Assuming $1.05 billion in cash, minus an estimate of $150 million in cash burn during Q3, the balance is $855 million. This represents 16.75% of its $5.103 billion market value.

In other words, the stock could theoretically fall to 83.75% to $3.32 per share, if the company's commercial operations turn out to be worthless. However, in practice, its customer list and technology and technology might be worth something to a bargain hunter buyer, so let's give it another $1.0 billion in value.

That still only brings its value to $1.855 billion compared to $5.1 billion in market value. That implies its scrap value is just 36.35% of its $19.81 price today. That means its value is no more than $7.20 per share or 64% below today's price.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock or crypto, as I am not undertaking to induce you to buy or sell securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

This represents my analysis of SPCE stock and it is not meant to provide you with specific advice in your own situation. I do not presently own SPCE stock or related securities, but I may buy some of these in the coming weeks.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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