Tag: SPCE

Virgin Galactic – Cool but economically challenged

I wrote back in 2019 about the original SPAC that took Virgin Galactic (NYSE: SPCE) public and my thoughts haven’t changed much from today.

Indeed, they had their hype – astute traders gamblers have seen their capital go from $10 up to $35, down to $15, up to $60, down to $15, up to now $50, in what is oddly like the trajectory the Virgin Galactic spaceship flies itself.

Today the main headline is Richard Branson flying out in one of those spaceships, in what was a massive marketing exercise – I bet Branson was jealous of all of the hype that Elon Musk was stealing over the past few years.

Much to their credit, the rocketship flight made it – they got their 70 seconds of propellant out and made it to the height of about 280,000 feet (or about 85 kilometers above the ground).

The marketing exercise is caused by the perverse anticipation of disaster, similar to how some people watch automobile racing to see car crashes.

This is all great and everything, and SPCE is likely going to trade up Monday morning, but I deeply suspect it will be a great time to short the stock. I will not be – I only mentally trade these sorts of situations with a million eyeballs and daytraders that will inevitably be crowding around the stock.

The issue is that the while the venture tries to do cool things, from an engineering perspective sending a craft out 85 kilometers over the surface is much, much more trivial than it is to send it to a practical altitude (low earth orbit) with the energy required to keep it there – Virgin Galactic’s ship just requires it to go up, and it glides to the bottom. A rocket ship going into low earth orbit requires it to go up (for example, the international space station is about 420 km above the surface), but also horizontally (about 28,000km/h) to keep it in perpetual free-fall. This requires a lot more energy to perform, and a lot more engineering with the design frame and engines which need to scale up disproportionately in order to haul these loads into orbit (mainly to handle the amount of fuel required to get there). This isn’t a matter of “extending the frame” to fit further usages – that design is hard-wired.

Amazon’s Jeff Bezos’ Blue Origin has a different system, the New Shepard rocket ship (which unlike Virgin Galactic, starts on the ground instead of on an airplane), which is designed to send people in a capsule up to around 105km – with a 110 second rocket burn. They will launch in just over a week. The same analysis applies to them as well. Scaling up to a point where you can do SpaceX-type activities requires a lot more engineering than slapping on a few extra engines and increasing the size of the fuel tank.

As such, the Virgin Galactic ship, as currently designed, has little use other than a tourism vessel. This was the intent of the design, the company was not meant to be other than an amusement factory. Cool but useless – and it’s a business model that almost guarantees there will be no repeat customers, similar to the skywalk at the Grand Canyon.

Virgin Galactic thoughts

Apparently Virgin Galactic is going public, via a SPAC currently traded as (NYSE: IPOA). The SPAC is a Cayman Islands shell capitalized with US$708 million cash waiting to be invested by its control owner, Chamath Palihapitiya. Before the Virgin Galactic announcement IPOA was pretty much trading at salvage value (it has a designated 2 year lifespan to invest in anything before it had to be liquidated):

When reading the news, my initial reaction was that IPOA would jump to the roof, as the market itself (space tourism) is relatively untapped from a publicly traded perspective. I wanted to flip the stock like pancakes on a griddle. IPOA was going to receive 49% of the Virgin Galactic entity.

The powerpoint deck associated with the announcement is located here. Skip to page 55 – financial overview for the meat of what an investor would be buying into.

Somebody investing in IPOA is taking a blind leap of faith. Why would Virgin sell a huge stake in the business if it was actually going to generate the numbers claimed? The presentation talks about being EBITDA profitable in 2021, but the underlying reality is that if you can’t even get a low cost domestic flight company (with two leased Airbus 320s) going without injecting a ton of capital and a lot of pain, what makes one think that running a one-of-a-kind rocket ship is going to be any different? The other question is – who in their might mind will pay US$250,000 for a ticket to a 55-mile above planet earth trip and do it again? There doesn’t appear to be a lot of ‘repeat’ value in these types of trips unless if they can make them similar to SpaceX’s vision of a 1 hour trip to anywhere on earth (which, if reliable and repeatable, I could see a true market for – it won’t happen because of noise pollution). But it also brings up the question of operational risk – one crash and the business is shot for at least half a decade.

Whenever I get the compulsion to buy something based off of a news headline in the Drudge Report, I solve this by performing imaginary day-trading. I inevitably lose money in my mind, and that relieves the psychological burden of not being involved. Of course, it is more agonizing when you look at entities like Beyond Burger and ask yourself what you’re doing reading balance sheets and income statements.

One of my negative screens is that if I read about some company on the mainstream news and it is not portrayed in an excessively negative light, I tend to exclude it as an investment candidate. The less attention given to a specific company means there is likely to be more value to be had by a closer examination. Markets are strange in this respect. But with Virgin Galactic, I’ll be a happy spectator and wish them the best of success – what they do is cool, similar to SpaceX.