Revenue Model of Virgin Galactic (SPCE)
this article is published on September 9, 2020 by Colm Moran on Mywallst.com.
This space tourism business has $80 million in deposits from over 600 wealthy customers, but this is only the start of how this company plans to make money.
Virgin Galactic (NYSE: SPCE) is in the final stages of testing with only 2 out of the 29 required tests yet to be completed. Commercial service is set to commence in 2021. A recent survey found that four in ten people with a net worth of over $5 million would be interested in buying a ticket. This means there is a total addressable market of approximately 2.4 million people, but how does Virgin Galactic plan to profit?
Virgin Galactic’s business model
Virgin Galactic aims to primarily make money by bringing tourists to space to experience zero-gravity. Currently, the company has over 600 customers signed up with a further 700 refundable deposits signed up in more recent times with the “One Small Step” initiative. Management has stated that there are very few requested refunds on deposits, possibly due to the net worth of its client base. This demand is likely to create a backlog of bookings for the first few years of service.
Space Tourism is not Virgin Galactic’s sole venture and is planning to use its “proprietary technologies and capabilities for other commercial and governmental uses,”. These other uses include point-to-point supersonic travel, and Virgin Galactic has unveiled a concept design for its Mach 3 aircraft. It has teamed up with engine maker Rolls-Royce to collaborate on this project.
It has also entered into a “Space Act Agreement” with NASA’s Johnson Space Center to facilitate commercial participation to the International space station. These expeditions could range from private to scientific research and is another lucrative opportunity for the company.
How does Virgin Galactic plan to make money?
Virgin Galactic had no revenue and reported a net loss of $63 million in Q2 of 2020, which has remained stable quarter-over-quarter. However, this is likely to change dramatically as commercial service begins in 2021. Tickets are in the price range of $200,000 — $250,0000, and select flights may be priced even higher which will bring in millions in revenue.
Virgin Galactic plans to have two spaceships completed by the end of the year and a third in testing by 2021. It hopes to have five spaceships and operate 270 flights a year in the fourth year of commercial operations, which is projected to take in $590 million in revenue, while gross profit will stabilize at approximately 70%. There is further upside opportunity if Virgin Galactic manages to reduce ticket prices as this would create increased demand.
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According to Morgan Stanley hypersonic travel is set to be valued at $800 billion in 2040. Although this is a long way off, it appears to be the future of travel, and if Virgin Galactic can capture a portion of this market, it will generate significant revenue.
It remains unclear the projected revenue from Virgin Galactic’s other ventures, but if the current plans are executed there is significant upside for the company. The current cash position is strong, with $360 million in cash and cash equivalents on the balance sheet and $136 million in debt.
What’s next for Virgin Galactic?
The recent departure of George Whitesides from CEO to Chief Space Office and his role being filled by former Disney executive Michael Colglazier is significant. This marks a transitionary period for the company after over ten years of the development phase and into a commercial-stage. Colglazier’s expertise in delivering a luxury experience safely will be of added value to the team at Virgin Galactic. Whitesides will continue to focus on the development aspect of Virgin Galactic’s business.
Virgin Galactic ambitions don’t stop at just bringing tourists to space but disrupting the traditional aviation industry as well. Continued concept design and development on the Mach 3 aircraft is its first step in point-to-point travel. It appears that it will be years down the line before this will be in commercial use as it is in the early stages.
Virgin Galactic is an exciting investment in a new era for commercial travel. However, you should only invest if you have a high appetite for risk.
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