Why Chamath invested $100 Million in Virgin Galactic (NYSE:SPCE)?
Here are the reasons why Chamath Palihapitiya invested $100 Million in Virgin Galactic personally.
*** I’m currently long on Virgin Galactic (NYSE: SPCE)***
Chamath Palihapitiya, the founder of Social Capital, enabled Virgin Galactic to go public directly without the use of an investment bank. He took the company public on the New York Stock Exchange by merging it with Social Capital Hedosophia (“SCH”), a public investment company. Social Capital invested $674 million and Chamath $100 million of his personal net wealth to acquire 49% of this venture at an enterprise value of around $1.5 billion.
When someone invests such an amount of money into a risky venture, it is noticeable. Especially, when you are dealing like Chamath on a daily basis with many compelling investment opportunities. Here are the reasons behind this investment:
1. Capitalizing on an ultra-luxury market
For us mere mortals, $250,000 for a 90-minutes-flight seem to be a “waste of money”. But for a small (or not so small) elite, it is relatively cheap in comparison to other experiences.
How much do you think does renting a yacht cost for a week? ~$500,000 per week!
How much a private island? ~$230,000 per week!
And one night at an exclusive presidential hotel suite? ~$80,000 per night!
These are unimaginable sums for an ordinary person. But high-net people value ultra-luxury experiences and travel quite often with a private jet around the world. Traveling by a private jet from New York to Los Angeles costs around $100,000. So, what is the cost of $250,000 to go to space and back?
Especially, when becoming an astronaut is one of the most exclusive experiences one can imagine. Only 571 people have been to space. While there have been more than 5,000 people on Mount Everest and it roughly cost around $100,000 to reach the summit of the highest mount on our planet.
The space experience is targeted to an elite that has definitely a strong appetite for “once in a lifetime” experiences. These group of superrich (defined as a personal net worth of more than $10M) have no issue spending one percent of their net worth for a discretionary purchase. This group is also growing as it has historically exceeded GDP growth and is estimated to grow by a CAGR of 6%.
Serving this group will be the top priority for Virgin Galactic in the near-term but its ultimate mission and purpose is “to open space for everyone”. With every substantial decrease in price, Virgin Galactic can attract many more customers. In the beginning, it will make the dreams of an elite come true: Going to space and becoming an astronaut. Many others will follow suit.
Revenues Growth
Virgin Galactic’s revenue should gain altitude quickly when it starts commercial operations. Virgin Galactic has laid out a clear path to achieving impressive revenue numbers.
This year, Virgin Galactic plans to send Richard Branson as one of the first private astronauts into space. Then it plans to launch another 15 flights into space, 115 in 2021, 170 in 2022, and 270 in 2023. With this impressive growth, Virgin Galactic can generate substantial revenue up to $590 Million by 2023.
Profitability
What also caught Chamath Palihapitiya attention is that although Virgin Galactic builds spaceplanes, it looks like a “software business” when you look at the profit margins. Virgin Galactic should be able to generate over 66% contribution margins. These are really impressive numbers for such a capital-intensive venture.
Outlook
Investing in Virgin Galactic requires patience but if the company can execute on its mission and targets, the growth for its stock should be mind-blowing. Chamath Palihapitiya wants to capitalize on the growing ultra-luxury market and enable it to democratize the space for everyone. The solid business should be able to generate substantial revenues and growth while running very profitable operations.
At the end of the day, you as an investor get a meal offered and you decide if you want to take a bite in it. The risk is high but so is the return.
“The totality of that, to me, I find deeply inspiring, and the exploration of life outside of just the Earth in which we’ve lived, I think, is really important for humankind. So for me, it’s just an opportunity to be around great people and help usher that along in my own way” (Chamath Palihapitiya).
*** I’m currently long on Virgin Galactic (NYSE: SPCE)***
