Why the future is galactic!
Why investing in Virgin Galactic (NYSE: SPCE) is a highly promising venture capital investment…
*** I’m currently long on Virgin Galactic (NYSE: SPCE)***
THE GALACTIC RACE
The Galactic race is on. As the new decade starts, we are in the middle of a very another space race than the Russian-American space race in the 50s and 60s. This race is led by three prominent business tycoons. Billionaires that channel their influence and fortunes toward helping humanity leave its home. Their names are Elon Musk, Jeff Bezos, and Richard Branson. Their visions are ranging from suborbital space tourism to colonizing Mars.
Today, I want to look in detail at Richard Branson’s Virgin Galactic (NYSE: SPCE) as they are in pole position to commercialize space and move humanity forward.
Virgin Galactic’s current spacecraft can carry six passengers and two pilots to the edge of space. The spaceship is dropped from a jet-powered aircraft and fires a rocket motor, reaching over three times the speed of sound as it climbs through Earth’s atmosphere (as shown in the graphic below). The spacecraft and its passengers then float weightless for a few minutes, before gliding back down to land on Earth much like a traditional aircraft. The current cost of a single ticket is a whopping $250,000.
NATURE OF THIS INVESTMENT
First of all, you have to understand the nature of this investment. Virgin Galactic had its IPO recently at the New York Stock Exchange on October 28th becoming the first public space flight company. The company decided to merge with the holding firm Social Capital Hedosophia at a $1.5 billion valuation and was directly listed without the usual support of an investment bank. As an investor, you can directly buy shares from Virgin Galactic under the SPCE ticker at the New York Stock Exchange (NYSE).
“For the first time, anyone will have the opportunity to invest in a human spaceflight company that is transforming the market.” (George Whitesides, CEO of Virgin Galactic)
At this current stage, I would compare this investment opportunity to a venture capital investment because the company has not delivered its service yet and thus has not earned any revenue. The company is right before its commercialization of space travel and raised capital from public investors to finally bring its technology to market.
A venture capital investment is considered being riskier than buying a bluechip share like e.g. GE, Ford, or Bank of America but it offers a higher risk-return tradeoff. It is normally quite unusual to participate in such an investment as most early-stage companies try to raise capital from private investors and institutional investors. At this moment, you have a chance to participate before the company reaches breakeven, which means profitability, and can further grow its sales. So, does it look appealing to invest in Virgin Galactic at this moment?
GREAT INVESTMENT OPPORTUNITY
I would argue that Virgin Galactic is in a prime position to capitalize on the tremendous space tourism opportunity. Here are the reasons:
1. Sustainable Competitive Advantage:
1.1. Strong Barriers to Entry & Proven Technology
Virgin Galactic has a sustainable competitive advantage. Developing mass-market rocket technology is extremely difficult. If it was simple, we would have many more people going to space. Currently, there have been only 562 people in space. For most ventures and companies, the barriers to entry are simply too high at the moment. Even if someone decided to invest the required capital to develop a successful rocket company, it would take many years to get to the point of Virgin Galactic.
Just to remind you, Virgin Galactic has tremendous experience in developing, testing, and launching rockets. Actually, Richard Branson formed Virgin Galactic out of a successful rocket company that he acquired in 2004. Scaled Composites was initially backed by Paul Allen, Microsoft founder, who helped the engineer Burt Rutan to develop a spaceship to win the X Prize. It was a $10 million award promised by entrepreneur Peter Diamandis in 1996 to the first private citizen to fly a manned ship across the Karman line (the widely accepted border of space) twice in the span of two weeks. Burt succeeded in 2004 and Richard acquired shortly the intellectual property from Allen and formed Virgin Galactic to continue Rutan’s work. Most people agree that this was the first milestone in privatizing space. Since then, Richard Branson has invested over a billion US dollars to further grow the business.
1.2 Limited Competition
At this moment, there are only two other companies that have the resources to compete with Virgin Galactic in the space tourism market: Jeff Bezos’ Blue Origin and Elon Musk’s SpaceX. Both companies have accomplished substantial technological breakthroughs and advancements in developing reusable rockets and helping to drive the cost of rocket launches down.
Both companies developed a single launch system where the rocket is immediately fired from the ground and later landed vertically. Virgin Galactic’s jet-powered aircraft start and traditional horizontal landing on a standard runway seem to be a more suitable technology for taking tourist on a short journey to the outer space. The other approach is more suitable for longer space missions when you need more power to escape earth’s gravity.
Neither BlueOrigin nor SpaceX has brought an astronaut into space. Virgin Galactic has already accomplished two successful test flights into space in 2018 and 2019. Being the first private company to do so. This milestone can be seen as a proof of concept of its technology and its leadership.
It looks that Virgin Galactic’s focus on space tourism will result in bringing the first paying customers to space. Even if the company will not be the first to deliver paying customers to space, we are looking at a capacity-constrained market.
2. Potential Total Addressable Market
Virgin Galactic has already sold over 600 tickets for $250,000 per ticket proving that there is a high demand for space travel. This number of customers is impressive as there have been less than 600 people in space yet. The potential total addressable market can grow to many more customers by lowering the high ticket price via advances in technology, labor and manufacturing efficiencies, and economies of scale. Virgin Galactic's mission is to democratize space by lowering the cost of space flight.
But at this moment, the experience that Virgin Galactic is offering is so scarce because they only have just one tested spaceship and another in the testing phase. Eventually, they want to grow to five spaceships by 2023. So serving the customer guarantees them the revenue for the next 3 years and exclusivity of spaceflight. The offered ticket price of 250,000 when you compare it to the $82 million that the Russians charge for a single seat on a Soyuz rocket. And there are many people that are willing to pay way more to be one of the first persons to space. At this moment, there is a clear product-market-fit. The only question is how fast Virgin Galactic can address this market and service its customers and eventually make spaceflight more and more affordable.
3. Potential Future Applications of Virgin Galactic’s Technology
Virgin Galactic has a three-phase growth strategy:
- Phase: Serve the first 600 customers are via its five spaceships-fleet and additional funding via research payloads that want to conduct experiments in micro-gravity and suborbital space conditions
- Phase: Democratize space by offering the same or better experience for a lower price
- Phase: Offer hypersonic point-to-point travel
Offering hypersonic point-to-point travel would completely disrupt the commercial aviation market (~$900 billion commercial aviation market and ~$600 billion total commercial passenger travel market). A regular flight from Los Angeles to Tokyo that lasts around 12 hours could be cut down to a mere two hours. The demand for such an experience will be extremely high as time is extremely valuable.
In addition to that, Virgin Galactic could benefit from other potential future applications:
- Selling or licensing of its spaceship technologies to third parties
- Offering electric air mobility
- Enabling hypersonic testbed
- Establishing high altitude persistent platforms
The Galactic race is on. Virgin Galactic is in the prime position to be first and dominate space tourism for the years to come.
The company has a sustainable competitive advantage with its proven technology and limited competition in the space tourism market. The total addressable market is sustainable and the demand for the offered experience will get higher with each price decrease. Hypersonic point-to-point travel has the potential to disrupt the massive commercial aviation industry and there are many other potential future applications for Virgin Galactic.
And 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.
*** I’m currently long on Virgin Galactic (NYSE: SPCE)***