SPCE Could Fall Even Further Than Ground Level

Virgin Galactic (NYSE:SPCE) has been on a bad downward spiral. From a recent peak of $55.91 on June 25, SPCE stock is now near a low point of $19.55. However, despite this, don’t act on the urge just yet to bargain hunt in this stock.

I forewarned investors that this could happen in both my May 3 article and my Sept. 8 article on Virgin Galactic. This was because I cautioned that the company was going to continue to post losses and would likely need to raise more cash. I believed that the dilutive effect on SPE stock would likely push it down.

Virgin Galactic reported second-quarter losses on Aug. 5. The company will likely face further losses, including in its Q3 earnings release set for Nov. 8.

Where Things Stand With Virgin Galactic

At the end of June, it had $552 million on its balance sheet. In late July Virgin Galactic raised another $500 million in cash. With the additional $500 million, it has over $1.05 billion on its balance sheet. But that may not be enough. Here’s why.

On Oct. 14, the company said that its commercial service would not begin until the fourth quarter of 2022. That will likely mean that the Virgin Galactic will continue to burn up a good deal of cash.

For example, during Q2 the company picked up $82 million in customer deposits. But it can’t spend that money until it actually begins commercial operations.

And as I pointed out in my last article, Virgin Galactic is burning through cash.

For example, in the six months ending Jun. 30, it used up $113.47 million in operating cash flow. After $1.647 million in capital expenditures (capex spending), free cash flow (FCF) burn during the period was $115.12 million.

I also pointed out that the run rate cash burn was $255 million annually based on the Q2 burn rate. If the upcoming quarter shows an even higher burn rate, it is possible that the cash the company has set aside to fund this burn rate could start to diminish again.

That is what the market is worried about. It doesn’t know where the future lies for this company in terms of its potential upside and profitability. For example, who is to say that there won’t be an additional delay beyond Q4 2022 before commercial operations begin?

What to Do With SPCE Stock

On the one hand, it is always tempting to try and pick up a stock that is well off of its highs like SPCE stock. But on the other, the unknowns and lack of clarity of when cash flow will start again mean that most investors will want to wait.

They will wait until the company has a more definitive operating plan to produce revenue and cash flow. For example, perhaps the company can garner some grants or other non-dilutive cash from NASA or even bondholders.

In fact, some believe that the company’s operations won’t even begin to scale until as late as 2025. In that case, the company’s cash balance won’t be sufficient to fund its operations until then.

It also doesn’t help that the company is being investigated by the FAA for deviating from its intended space flight plan in its last flight. The New Yorker magazine reported that this was on the flight that Sir Richard Branson was on in July and that it reportedly had a lax attitude to reporting its procedures and safety issues.

Most investors will want to see what is going to happen over the near term. That includes trying to determine whether its ongoing cash burn will significantly erode its cash balance over the next year. So, for the time being, most value-oriented investors will wait for more clarity about the company’s underlying value prospects.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. 

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.