Flight Cadence And Pricing Power Will Likely Limit Long-Term Space Tourism Upside

Catalysts

About Virgin Galactic Holdings

Virgin Galactic Holdings develops and operates suborbital spaceplanes and launch systems focused on private astronaut experiences and research missions.

What are the underlying business or industry changes driving this perspective?

• The business model is heavily dependent on achieving and sustaining very high flight cadence from a small initial fleet. Any persistent production delays, test setbacks or reliability issues could keep realized flight volumes well below the 125 missions per year assumption, capping revenue growth and pushing out earnings inflection.
• The company is counting on repeated ticket price increases above the last published level of 600,000 dollars per seat. A finite pool of ultra high net worth early adopters and competing space and microgravity experiences could constrain pricing power, limiting average revenue per flight and compressing long term revenue versus management’s targets.
• Long life, highly reusable hardware such as the new oxidizer tank reduces maintenance downtime in theory. However, if real world wear, unexpected inspections or refurbishment needs prove higher than modeled, unit economics could deteriorate with lower net margins and weaker cash generation than the current PP&E buildout implies.
• Expansion into adjacent commercial space opportunities in avionics and launch services is positioned as a future growth engine. Government and institutional customers have lengthy procurement cycles and entrenched alternatives, which could translate into slower contribution from these initiatives and prolong Virgin Galactic’s path to meaningful diversified earnings.
• The strategy assumes smooth operational ramp at Spaceport America and eventual scale up with additional SpaceShips and a second launch vehicle. Any regulatory tightening, safety incident or infrastructure bottleneck could materially limit fleet utilization, driving structurally lower revenue and delaying any move from sizable net losses to sustainable profitability.

Assumptions

This narrative explores a more pessimistic perspective on Virgin Galactic Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Virgin Galactic Holdings's revenue will grow by 392.5% annually over the next 3 years.
• The bearish analysts are not forecasting that Virgin Galactic Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Virgin Galactic Holdings's profit margin will increase from -17615.7% to the average US Aerospace & Defense industry of 8.4% in 3 years.
• If Virgin Galactic Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $16.7 million (and earnings per share of $0.22) by about December 2028, up from $-292.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $94.1 million in earnings, and the most bearish expecting $-256.1 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, up from -0.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 38.7x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Successful execution of the Delta class program, including resolving current fuselage and feather manufacturing challenges within existing schedule contingency and qualifying long life components like the new oxidizer tank for 500 or more flights, could enable the targeted 125 missions per year and drive much higher long term revenue and adjusted EBITDA than a bearish view assumes, supporting stronger earnings power.
• The company’s shift from R&D expense to capital investment, evidenced by a 67% increase in PP&E tied to SpaceShips and manufacturing capacity, alongside steadily improving free cash flow trends and disciplined capital deployment, may result in structurally better net margins and earlier than expected cash flow positivity, improving earnings and balance sheet strength.
• Virgin Galactic’s ability to raise ticket prices above the last published 600,000 dollars per seat through tranche based yield management, while ramping flight cadence prudently from one flight per week to three flights per week, could materially expand revenue per flight and total revenue, even as operating costs are spread over a growing number of missions, enhancing net margins and earnings.
• Emerging adjacency opportunities in avionics, rocket systems and launch vehicle services, combined with growing demand from research institutions and government agencies for frequent, high quality microgravity and high altitude missions, could open sizable incremental revenue streams beyond private astronauts and lift long term revenue, diversify earnings and support more resilient net margins.
• Secular growth in global interest in space tourism and space research, reinforced by a loyal backlog of customers prepared to fly in 2027 and new university partnerships such as the Purdue 1 mission, could sustain strong demand as capacity scales, reducing pricing risk and supporting higher utilization, which would boost revenue, improve operating leverage and drive better long term earnings than a declining share price would imply.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Virgin Galactic Holdings is $2.0, which represents up to two standard deviations below the consensus price target of $4.12. This valuation is based on what can be assumed as the expectations of Virgin Galactic Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $2.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $198.5 million, earnings will come to $16.7 million, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 12.1%.
  
• Given the current share price of $3.24, the analyst price target of $2.0 is 62.0% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.