Virgin Galactic had a successful test flight on July 11, 2021. See the flight path above. After reaching its peak, VSS Unity came down through an unpowered glide. I believe the exact same has been happening on Virgin Galactic’s stock price (ticker: SPCE), peaking out during the test flight weekend and continuing its unpowered glide downward.

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For SPCE, bullish arguments are obvious: large TAM, software business–like EBITDA margin, etc. The company even dedicated a section of its public filings to touting its TAM and potential profit margin levels.

Sensible investors are skeptical. For most businesses, “TAM” means a market of recurring revenues. A dairy farm’s TAM is made up of families who drink the farm’s milk products daily. An airline’s TAM consists of travelers who fly typically several times a year. TAM is usually recurring in nature.

How about the TAM of a space tourism company? Even if a person can afford the ticket price, how often does he/she want to be sent into space to see the curvature of the Earth? Once, twice, or many many times? Daily? Weekly? Monthly? Really? How about personal safety concerns? Is there a real need to do it more than once?

I argue, therefore, the so-called “TAM” for space tourism is drastically smaller than what a casual observer would conveniently conclude. It is because it is non-recurring, at least for the near-term.

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Back to Virgin Galactic, let’s make some assumptions and run some numbers:

• Average ticket price is approximately $250,000 per passenger. Target customers are individuals with $10m+ net worth.

• By 2025, the number of $10m+ net worth individuals worldwide would reach 3.3 million (source: Credit Suisse, and my calculations).

• Among them, let’s assume one third would feel comfortable for space travel by 2025.

This set of assumptions means by 2025, the total “life-time” revenue of the space tourism industry would be approximately $275 billion (=3.3m x 1/3 x $0.25m).

Virgin Galactic’s market cap last week stood at approximately $13 billion. Assuming Virgin Galactic owns 100% of the space tourism industry, equity investors were effectively throwing in $1 in exchange for a $20 life-time revenue ($13 billion to $275 billion)

Then, consider these elements:

• Long-term market share: competitors now include at least Blue Origin and SpaceX.

• Long-term profit margin: Virgin Galactic predicts a 46% EBITDA margin by 2023 (source: company documents).

Let’s keep the math simple. If Virgin Galactic reaches an EBITDA margin of 50% and controls the entire market, equity investors would then face a trade-off of paying $1 of equity for $10 of life-time EBITDA earnings ($1 to [$20 x 50%]). If Virgin Galactic, Blue Origin and SpaceX equally split the pie with 33% of market share each, Virgin Galactic investors’ math becomes $1 of equity for $3.3 of life-time EBITDA earnings. That trade is already not too attractive, even ignoring that it contains the explicit assumption of a 50% EBITDA margin (better than most FANGMAN stocks!) and the implicit assumption that Virgin Galactic will achieve that 50% margin immediately needing no time to ramp up (unrealistic in itself!).

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To make a prudent investment decision, prudent investors must consider more factors, such as the following:

• Product: Virgin Galactic’s VSS Unity didn’t reach the Kármán line — the internationally recognized boundary between Earth’s atmosphere and outer space — while its competitors can.

• Passenger safety: human tragedy events can push back business goals for years, leaving equity investors holding the bag. An example is the 2014 tragedy of VSS Enterprise, which killed one pilot and seriously injured the other; it delayed Virgin Galactic’s efforts by years (lucky there were no passengers onboard!)

• Technology: business common sense guides me to review the profile of company CEOs, which paints a picture of sharp contrast.
  • Virgin Galactic’s CEO: Michael Colglazier — ex-Walt Disney (26 years) focusing on parks and consumer experiences
  • Blue Origin’s CEO: Bob Smith — ex-Honeywell Aerospace (13 years) with a PhD degree in Aerospace Engineering
  • SpaceX CEO: Elon Musk — the engineering genius

• Optionality: Virgin Galactic said in its public filings that it can disrupt long-haul travel. I wonder how an unpowered glider can deal with air traffic control if it is asked to stay in the air for a little while longer. I also wonder how an unpowered glider deals with adverse weather conditions and still keeps passenger both satisfied and safe.

• And many other issues such as future stock sales, future marketing expenses (if not for Sir Richard Branson’s personal brand), future R&D, etc.

All in all, my sense is that Virgin Galactic’s stock price will follow the path of its successful July 11 test flight. It will be an unpowered glide for now… Until the next flight takes off!

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