On Friday, Jefferies maintained a positive outlook on Virgin Galactic (NYSE:SPCE), reiterating a Buy rating and a $10.00 price target for the aerospace company. The firm's perspective follows discussions with Virgin Galactic's CFO, Doug Ahrens, and Eric Cerny, VP of IR + Finance, focusing on the company's future business model and financial forecasts.
The company is preparing for the introduction of its Delta spaceship in 2026, which is expected to significantly ramp up operations. Virgin Galactic anticipates peak free cash flow (FCF) usage in 2024, with a reduction in 2025 as one-time costs decline. The company is nearing the end of its design phase and is progressing with tooling and parts fabrication. With $821 million in cash and securities, Virgin Galactic believes its current financial position will support the assembly and testing of the first two Delta ships.
Virgin Galactic's business model is built on rapid turnaround times and increased access to space, aiming to serve a growing market of potential customers interested in human spaceflight. The company has already booked 700 customers from 60 countries, targeting a market of 300,000 potential customers. The Delta spaceship's design, featuring a replaceable rocket motor, is expected to allow hundreds of flights annually.
The initial fleet, comprising two spaceships and one mothership, is projected to generate $450 million in revenue with 125 flights and 750 passengers at an average ticket price of $600,000. Expansion plans include increasing the fleet and potentially opening a second spaceport by 2030, which could double the revenue to nearly $2 billion.
Virgin Galactic's scale-up strategy is designed to leverage fixed costs and improve margins. With the initial fleet, the company anticipates EBITDA margins of 20 to 25%, which could increase to approximately 48% with four spaceships and two motherships.
A further scale with two spaceports could result in EBITDA margins between 50 and 55%. Virgin Galactic, known for pioneering private human spaceflight, has completed seven commercial space missions, with a temporary pause as it develops the Delta Spaceship, expected to enter service in 2026.
In other recent news, Virgin Galactic has faced a significant price target cut from Morgan Stanley, which maintained its Underweight rating while reducing the price target from $35.00 to $5.00. The adjustment was made following Virgin Galactic's announcement that commercial flights would be postponed until approximately 2026. This delay has led to a substantial decrease in the company's stock value, largely due to investor concerns about the feasibility and economic attractiveness of Virgin Galactic's business model.
In addition to this, Virgin Galactic announced significant progress in the development of its Delta Class spaceships during its second-quarter earnings call. The company is transitioning from the design phase to the build and test phases, aiming to launch commercial operations by 2026. Virgin Galactic projects substantial revenue growth, with an annual revenue target of $450 million with its initial fleet, potentially reaching $2 billion as its fleet and spaceports expand.
Lastly, Federal Communications Commission Chair Jessica Rosenworcel has called for increased competition in the satellite internet sector, currently led by SpaceX's Starlink project. This call for competition underscores the importance of inviting more space actors to foster innovation and potentially improve services for consumers.
InvestingPro Insights
While Virgin Galactic's ambitious plans for the Delta spaceship and future revenue growth paint an optimistic picture, current InvestingPro data reveals some challenges. The company's market capitalization stands at $174.75 million, reflecting a significant decline in valuation. This is underscored by the stark year-to-date price total return of -88.1%, indicating substantial investor skepticism.
Despite these headwinds, InvestingPro Tips highlight that Virgin Galactic holds more cash than debt on its balance sheet, which aligns with the company's statement of having $821 million in cash and securities to fund the Delta ship development. Additionally, the stock is trading at a low Price / Book multiple of 0.44, potentially suggesting undervaluation relative to its assets.
However, it's crucial to note that Virgin Galactic is not currently profitable, with a negative gross profit margin of -829.67% for the last twelve months. This reflects the company's ongoing investment phase and aligns with their expectation of peak free cash flow usage in 2024.
For investors considering Virgin Galactic's long-term potential, InvestingPro offers 13 additional tips that could provide deeper insights into the company's financial health and market position. These tips could be particularly valuable in assessing the feasibility of Virgin Galactic's ambitious growth plans against its current financial performance.
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