Virgin Galactic shares: what you need to know as it goes public

'Great progress in our test flight program means that we are on track for our beautiful spaceship to begin commercial service. By embarking on this new chapter, at this advanced point in Virgin Galactic’s development, we can open space to more investors and in doing so, open space to thousands of new astronauts.' – Richard Branson, 2019.

The space industry has evolved since man first landed on the moon 50 years ago, but the public has not had an opportunity to invest in this exciting and revolutionary industry – until now.

Historically, the job of exploring space and all the possibilities it holds has been confined to government-funded institutions, like NASA. But countries with major space programmes have seen funding stagnate – NASA is investing the same sums now as it was five decades ago, about $10 billion a year, and while that is nothing to be sniffed at, exploring the universe is not cheap.

A swathe of well-funded private companies have emerged over the past 20 years. Most were initially regarded as expensive hobbies of the iconic businessmen that founded them, whether that be Richard Branson’s Virgin Galactic, Jeff Bezos’s Blue Origin or Elon Musk’s SpaceX. But today, these companies are injecting fresh investment into the industry - private space companies are thought to have invested, on average, around $1.8 billion annually since 2009. And they are bringing some fresh eyes to an industry that has been more than willing to spend whatever is necessary in the name of science and research, by bringing down costs, increasing utilisation and developing new technologies at much faster speeds.

We have a look at the unique opportunity on offer to investors as the markets prepare to welcome the first-ever space company to go public.

Virgin Galactic to go public but not through an IPO

Virgin Galactic is not launching an initial public offering (IPO) and is therefore not taking the traditional route to market. Instead, the company has agreed to merge with a shell company that is already listed. Usually, this method is used by smaller companies because it is quicker than preparing for an IPO, which can take years.

What is a reverse takeover and how does it work?

The company will merge with NYSE-listed Social Capital Hedosophia Holdings Corp, which is led by Chamath Palihapitiya, a former member of the senior executive team at Facebook, and Adam Bain, the former chief operating officer (COO) of Twitter. The company was established for the sole purpose of merging or acquiring another business.

The deal has a total equity value of $1.96 billion but some of that is offset by $460 million of debt, meaning the enterprise value is $1.50 billion.

The existing shareholders of Virgin Galactic will receive $300 million in cash and 100 million shares in the new company priced at $10 each, worth a collective $1.0 billion. The cash element will be made up of $200 million from existing investors selling down their stakes, with the other $100 million coming from an additional investment from Palihapitiya, who will become chairman of the business.

Virgin Galactic is currently owned by Virgin Group, which is a collection of businesses that generate $21 billion in annual revenue, and the Mubadala Investment Group, which has a diverse $225 billion investment portfolio and owned by the United Arab Emirates (UAE) government.

Assuming the existing shareholders of Social Capital Hedosophia do not sell down any of their stakes upon completion, they will collectively own 49% of the business with the existing owners of Virgin Galactic owning the other 51%.

When is Virgin Galactic going public?

The deal is expected to be completed in the third or fourth quarter (Q4) of 2019, once approved by Social Capital Hedosophia’s shareholders. The company will be immediately renamed Virgin Galactic Holdings Inc.

Why is Virgin Galactic going public now?

Virgin Galactic thinks it is the right time to go public because it believes it is on the cusp of launching a fully-functional and profitable space tourism business. It expects to launch its first commercial flight next year.

The company has demonstrated its technology works, lowering the risk for investors, after it completed its second crewed-space flight in February. That came just weeks after the spaceship, VSS Unity, made its inaugural flight in December. The company says its spaceship, VSS Unity, is the 'first and remains the only vehicle built for regular commercial service to have put humans into space'.

More big-name space companies could begin to tap public markets soon, and Virgin Galactic believes there is an advantage in being the first. Interestingly, ride-hailing firms Uber and Lyft both raced to list first in an attempt to capitalise on the market’s excitement, but both have fallen since (Lyft won the race, but its poor performance is actually thought to have delayed Uber’s IPO). There are a handful or two of big-name space companies that could potentially go public, but nobody is expecting a flood of new listings or for it to happen quickly.

What is an IPO?

Although it could find itself competing for the hearts of investors, Virgin Galactic at least knows its position in the industry is well-guarded by the high barriers to entry. Palihapitiya said he was confident Virgin Galactic is 'light years ahead of the competition' and, with over $1 billion invested over 15 years, there is no chance of major new rivals appearing overnight.

The decision to go public could, however, have been made quicker than Virgin Galactic first intended. The company had agreed in 2017 to take $1 billion in investment from the state-owned Public Investment Fund (PIF) of Saudi Arabia with an option for it to deploy another $480 million, but pulled out following the murder of journalist Jamal Khashoggi last year. That investment is essentially equal to the enterprise value of the merger.

Understanding Virgin Galactic

There are two primary components to the company: Virgin Galactic and The Spaceship Co.

Virgin Galactic is the commercial arm of the business responsible for flights. It is based at Spaceport America in New Mexico, US, which is the first and only purpose-built commercial spaceport in the world. This is where it will launch its space flights. The majority of the unit’s 150-strong workforce moved there in May.

Virgin Galactic implemented a low-capital strategy for the spaceport that it intends to replicate so it can construct more. The New Mexico government paid $200 million to build Spaceport America and in return Virgin Galactic pays $5 million in annual rent and fees. Involving the government in this way also means securing licenses and approvals is far easier. The company is likely to be having discussions about opening new spaceports in other countries already as it can take years to make an idea a reality. Italy looks set to be the location of the company’s first European base after the government signed a framework agreement to build the Grottage Spaceport last year. It also signed an agreement with the UAE Space Agency earlier this year.

The Spaceship Co is the part of the business responsible for designing and building the crucial technology needed to offer space flights. The 650-strong team has developed everything from the reusable technology that has significantly brought down the cost of space exploration to the re-entry system needed to bring everyone back.

How does a Virgin Galactic flight work?

In a nutshell – you attach a spaceship (SS2, or SpaceShip 2) to a plane (WK2, or WhiteKnight 2) and, once the plane is high enough, separate the spaceship so it can launch into space before returning to Earth and landing on a runway like any other aircraft.

^{Source: Virgin Galactic 2019 investor presentation}

Passengers are rewarded with awesome views and get to experience microgravity, and they go just about high enough to be officially recognised as astronauts when they return. The total flight time is around 90 minutes.

How much is a Virgin Galactic flight?

Taking a Virgin Galactic flight is an experience, not a mode of transport (for now), and one that does require preparation. It involves three days of microgravity and G-force training, suit fittings (made by Under Armour), and rehearsals before flying on the fourth day, coming back for a party as an official astronaut.

A total of 600 people have put down a sizeable deposit to reserve their space flight. Collectively, they have paid $80 million in deposits, implying an average of $133,333 each. Those that have paid the deposit have had to wait a long time too. The company stopped taking reservations in 2014 in fear of promising too much to too many.

However, the tickets have not been sold at a flat rate. Of the 600 flights sold so far, 65 of them have cost less than $200,000, 85 have cost $250,000 and 444 have cost in-between $200,000-$250,000. The company seems to focus more on a customer’s net worth, with the company targeting people willing to spend somewhere around 1% of their entire wealth on the experience. About 70% of its pre-orders have come from high net worth individuals with a net worth of below $20 million, with the other 30% from richer clientele.

The prices are high but going to space is something that can’t be compared to anything else, and the affluent are willing to spend considerably more money for much less in return. Virgin Galactic happily points out that renting a private yacht for a week can cost $500,000 while an exclusive hotel suite can cost $80,000 for one night. Quite simply, if someone is willing to spend $250,000 on a private jet from Los Angeles to South Africa, then why wouldn’t you pay the same to become an astronaut and see the very edge of our world? Virgin Galactic said it has had to turn down over 2500 people that had called the company to enquire about making a reservation since it halted taking reservations five years ago.

Virgin Galactic expects to fly just 66 passengers in 2020 but this will rise quickly. It forecasts it will carry 646 passengers in 2021, 965 in 2022 and 1565 in 2023. If achieved, it will have flown over 3200 people to space by the end of 2023.

Is Virgin Galactic profitable?

In short, no. But the company aims to be profitable in 2021 (at least at the earnings before interest, tax, depreciation and amortisation [EBITDA] level). By 2023, when its operations are in full swing, it expects to be booking a contribution margin of 66% of each flight. That is based on each flight generating roughly around $1.3 million in revenue and costing about $430,000 in fuel, pilot costs, insurance and maintenance work. That would leave it with around $800,000 in profit.

The fact Virgin Galactic has figured out how to reuse most of the expensive equipment needed to conduct space launches means the economics get better as more people use it. Scale provides efficiencies and the company believes it can bring the costs down quickly. Overall, it expects to be booking an EBITDA margin of over 46% in 2023, generating $274 million in earnings from just $590 million in revenue. That is a stark jump from the 5.5% margin and $12 million of earnings it expects to book in its first full year of commercial operations in 2021.

Virgin Galactic earnings forecast to 2023

^{Source: Virgin Galactic investor presentation}

The newly-merged company’s enterprise value of $1.5 billion will be equal to around 2.5x projected revenue and 5.5x projected EBITDA in 2023.

What does the future hold for Virgin Galactic?

There are two big goals to hit in the near term. The first is to successfully launch its first commercial operation and demonstrate it can carry out regular flights without incurring technical problems. The second is to prove it can do this profitably. It is not that dissimilar to the likes of Tesla. Investors bought into the idea that they were part of a business truly revolutionising transport but one snag after the other has slowly tested their patience, and now shareholders put sustainable profits over anything else. The array of prospects for the space industry means some investors won’t need much encouragement to back Virgin Galactic, but it has promised to be profitable in 2021 and, if it isn’t, then starry-eyed investors may start to lose patience. A private company can progress at whatever pace it wants and prioritise whichever goals it needs to, but a public firm has investors to please.

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Virgin Galactic: from space real estate to asteroid mining

Virgin Galactic is in the first of a three-phase growth plan, and the prospects could (literally) be limitless. In the very long term it even talks about offering 'habitats and real estate' and harnessing 'space resources and energy' through asteroid mining. It already offers other services outside of tourism, such as aiding government research projects or launching satellites for third parties. It recently set up Virgin Orbit to take over its satellite business after recruiting Dan Hart, a 34-year veteran from Boeing that headed the firm’s satellite programmes, to lead the business.

Below is a list of growth opportunities for the business. The company is already conducting some of these activities and aiming to expand them, while others are considered prospects over the (very) long term and not factored into its current plans.

• Offering launch and space transportation services to third parties
• Launching satellites on behalf of third parties
• Helping with microgravity research
• Space infrastructure and services
• Long-haul transport
• Habitats and real estate
• Space resources and energy

Should the aviation market feel threatened by Virgin Galactic?

In the more immediate future, Virgin Galactic has long haul air travel in its crosshairs. By building out its spaceports around the world, it believes it can offer superfast long-haul travel unlike anything the world has ever seen. The company claims a Virgin Hypersonic Jet could travel from Los Angeles to Tokyo – usually an 11-hour trip on a standard jet or 5 hours on a supersonic one – in just 120 minutes.

Virgin Galactic estimates the global aviation market is worth $900 billion each year, and that around $600 billion of that is attributed to long haul flights.

What companies could be impacted by the emerging space industry?

Virgin Galactic and others are regarded as space companies, but their businesses overlap several major industries. Governments are launching more satellites than ever before, mainly to gain insights about the world or for defence purposes. It has clear ambitions to disrupt the aviation market, including airlines' monopoly over long haul international travel.

Those are not industries to enter lightly. Boeing, Airbus, BAE Systems, Lockheed Martin, Raytheon, Northrop Grummam, Inmarsat and United Technologies are just some of the major companies that Virgin Galactic could find itself competing against.

How to trade Virgin Galactic shares

Investors will have to wait for the merger to complete before they will be able to trade Virgin Galactic shares. Social Capital Hedosophia is already a publicly-listed company, so you can invest in or trade them now. However, with the deal based on a price of $10 per share, the share price is likely to remain fairly static until it is completed (shares spiked on the announcement of the merger but have fallen back to just over $10). Remember, investing in the company before the merger is completed comes with its risks: if the deal fell through for any reason then you may find yourself having paid a hefty price to invest in a shell company with no assets.

It is worth tracking Social Capital Hedosophia’s filings with the Securities & Exchange Commission (SEC) to keep up to date with how the deal is progressing and watch out for any news on a date. You can also follow news releases from Virgin Galactic.

If you want to try out investing or trading before making any firm commitments then you can open an IG demo account, allowing you to try out your strategies or ideas without any risk. Or, you can open an IG account and open your first position.