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“Wait, we have a MOU with ….”
Throw your mind back to February this year, you know, before the market decided that the world would end and then decided that Jerome Powell was the new avenger who would save us all, after which the market decided to fact everything was wonderful despite that, pandemic issues people continued with. Then, in the hazy days of innocence, we published a note on Virgin Galactic (SPCE) Q4 2019 earnings. We said, if you ever longed to invest as a VC, but are not a VC, this is your chance. Because SPCE is a pre-income that is run just like a VC-supported business, except that its shares are traded on a real stock exchange. And it has to do tiring things like SEC applications, income talks and so on as a result. You can read the February note here.
We have told our subscribers and everyone else who would listen that SPCE will need to make a capital investment soon. This is a capital-intensive business with a burning rate (see – VC-supported phrasology!) Of about 60 million dollars / qtr and because it has no revenue, it has a limited number of quarterly tracks at a certain time.
In recent weeks, SPCE has made the classic B-round preparations.
First up, the company hired a new CEO with a company background. Michael Colglazier’s pitch from Disney (DIS) is to bring Disney-class consumer focus and security to SPCE’s core service. Former CEO George Whitesides remains on the bus as Chief Space Officer and has handled the change in an exemplary manner, at least to an external observer.
Second, the company entered the beginning of the B-round fundraising meeting – for which read Q2 revenue calls – with the most famous of VC artifacts, the non-binding Memorandum of Understanding. In this case, with Rolls-Royce (OTCPK: RYCEF) to work with hypersonically capable regular aircraft – propulsion rollers, SPCE – and probably their investor Boeing (BA) aircraft.
Third, during the B-round meeting / revenue call for the second quarter, they used the sacred phrase that the SPCE shareholders wanted so that they were the “orbital spaceflight program”. In other words, the right space. Not just-about-space-but-under-the-Karman line. Real space. Then it got better. Works with NASA’s Johnson Space Center in TX to deliver commercial service to and from the International Space Station – which NASA and other stakeholders hope to commercialize now that its planned life as a government laboratory is over.
Along the way, they pulled the numbers – no recognized revenues, fuel rates did not deteriorate, customer indications of interest are growing, very few deposit cancellations as a result of the Covid crisis. No one looked at the numbers because everyone was still all-jitter about that spaceflight program.
And then the coup de grâce, the B-round. An increase in equity of approximately USD 500 million, depending on the price achieved per newly subscribed share. Invitations went out through key brokers; the time for expressions of interest closes at the end of the day on 5 August.
The stock, which has been riding high lately, sniffed quickly and then added a barrel roll as he walked towards the sea during Tuesday’s trading hours.
We ask to be different.
SPCE’s risk profile is just like for a VC-supported activity in the B-round stage. Misunderstanding so you can lose money. And not just your usual oh-I-bought-AT&T-at-4% -yield-I-am-such-a-dummy lose money. We mean losing, like, all the money. Let’s take what you read.
But the upside is also just like for a VC investment at an early stage. The company now has three major addressable markets:
- Suborbital space tourism – from 2021 or 2022
- Sort-of-Hypersonic flights from point to point – from the beginning we do not know when
- Orbital commercial journey – starting … maybe 2026? Earlier? Later?
It also has, or will soon, have more than eight quarters of cash on hand, which in VC country is a lot. And it has a very strong management team – commercially and technically – and a board whose experience includes making money with companies right at this stage of development. Finally, it has a tailwind from the fact that the market is getting very excited about space as a sector – not least because if you go listen to Q2 revenue from the defense makers – companies we cover, including Lockheed Martin (LMT), Northrop Grumman (NOC) and L3Harris (LHX), you will hear their CEO say that space is their fastest growing industry. In VC, timing is everything. You want to catch the wave just right. Not too early – where you’re just burning money waiting for the world to remember and not too late – where your business is not worth much because you’re the fourth to become public or acquired.
We believe that SPCE has its right to the time to catch the wave. You have the theater of American capsule thinking that once enchanted the nation, you have the second space paper warehouse, Maxar Technologies (MAXR) that flies high, and you have a competition between three billion-supported companies – like SPCE, SpaceX (SPACE) and BlueOrigin (BORGN) ) to deliver orbital space tourism – nothing like competitive pressure to deliver returns.
So we are on Buy – Long Term Hold on SPCE – we were before the B-round and we are now. It’s not a weak heart stock, it can hurt your account balance on a given Monday, and you could lose your money. But we believe the stock has lunar potential and we do not care to ride out volatility along the way.
Oh, by the way, as if that matters, here’s the company’s economic progression:
Source: Company SEC Applications, YCharts.com, Cestrian Analysis
And its rating:
(Yes, that’s right. $ 4 million TTM revenue and 1000x TTM revenue valuation).
Over the years, we have heard that many non-VCs reject the lack of opportunity to invest VC-style. Well, right here you have just that opportunity. Potential big returns … potential big losses. Good luck everybody!
Cestrian Capital Research, Inc. – August 4, 2020.
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Disclosure: I am / we are long SPCE, MAXR, LMT, NOC, LHX. Business Relationship Information: See the full disclaimer language at the top of the article.
More information: Cestrian Capital Research, Inc. employees hold long positions in personal accounts in SPCE, MAXR, NOC, LHX, LMT.
Editor’s note: This article discusses one or more securities that are not traded on a major US stock exchange. Be aware of the risks of these stocks.