With shares down 98% over the last five years, Virgin Galactic (NYSE: SPCE) is a perfect example of the risks involved in stock market investing. While speculative, unprofitable companies can be attractive because of their volatility and millionaire-maker potential, they also face a high risk of failure because reality eventually catches up to the hype.
That said, investors seem to be returning to Virgin Galactic stock after better-than-expected earnings and some analyst upgrades. Shares rose by an impressive 80% on May 16. But is this move a dead cat bounce or the start of a sustainable bull run for the company? Let's dig deeper.
Is space tourism a real opportunity?
Virgin Galactic is helping pioneer a brand new industry called space tourism. Currently, this involves sending wealthy individuals on brief, recreational flights to suborbital space -- roughly 51.4 miles above sea level in Virgin Galactic's case (although rival services may go higher).
While these trips fall short of "outer space" (62 miles above sea level), it is enough to offer passengers a brief period of weightlessness and the ability to view planet Earth from a remarkably high vantage point.
Unsurprisingly, tickets are expensive, at around $600,000 per seat. Still, the company is betting that enough wealthy people will be willing to open their wallets for a once-in-a-lifetime experience. They might be right.
For context, top-of-the-line hotel rooms, such as the Royal Mansion in Dubai Atlantis, cost a jaw-dropping $100,000 per night. And climbing Mount Everest can cost from $33,000 to $200,000, depending on the package, according to Expedreview. Virgin Galactic believes it can attract these same high rollers and estimates space tourism has a total addressable market of 300,000, which isexpected to grow 8% annually.
Talk is cheap. Where are the results?
Any investor who has spent enough time analyzing speculative stocks knows that talk is cheap. Companies often make exciting projections that might not actually materialize, so it usually makes more sense to focus on their current performance and growth rates. Virgin Galactic's first-quarter results leave much to be desired.
Revenue fell 77% year over year to $461,000, although a reduction in expenses (mainly research and development) helped the company narrow its operating loss from $113.1 million to $88.9 million.
This cash burn is still alarming. With just $140.8 million in cash and equivalents on its balance sheet, Virgin Galactic won't be able to sustain its losses without turning to outside sources of capital, such as equity dilution. Equity dilution essentially means creating and selling more units of its stock while its market cap remains the same. The result is that each share represents a smaller claim on the business and its future earnings.
Image source: Getty Images.
Virgin Galactic is still in a pre-commercial stage. Its primary focus is building and designing its aircraft while getting the necessary regulatory approvals to start flying paying customers in 2026. In this context, shareholders may benefit more from the company diluting its shares to raise cash because it increases the chances that it will make it to commercialization and avoid worse outcomes, such as bankruptcy.
Is Virgin Galactic a millionaire-maker?
Now it's time to answer the big question: Is Virgin Galactic a potential millionaire-maker stock? The short answer is yes (with some significant caveats). If the company can successfully establish commercial operations, its business could generate substantial shareholder returns over the long term. However, this isn't guaranteed.
While Virgin Galactic's management claims they will be able to start commercial operations in 2026, the company has a long track record of overpromising and underdelivering. In fact, the first passenger-carrying flights were supposed to begin in 2011 -- a whopping 14 years ago. Virgin Galactic keeps kicking the can down the road, so investors should take everything it promises with a grain (or perhaps a handful) of salt.
We don't know when Virgin Galactic's commercial operations will begin. That means the company is likely to continue burning through hundreds of millions in capital each year and diluting shareholders. The risks outweigh the potential rewards right now.
Should you invest $1,000 in Virgin Galactic right now?
Before you buy stock in Virgin Galactic, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Virgin Galactic wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider whenNetflixmade this list on December 17, 2004... if you invested $1,000 at the time of our recommendation,you’d have $642,582!* Or when Nvidiamade this list on April 15, 2005... if you invested $1,000 at the time of our recommendation,you’d have $829,879!*
Now, it’s worth notingStock Advisor’s total average return is975% — a market-crushing outperformance compared to172%for the S&P 500. Don’t miss out on the latest top 10 list, available when you joinStock Advisor.
Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
