Is Virgin Orbit’s stock going to take off like a rocket?
If you think you haven’t maximized your short time here on earth, read Sir Richard Branson’s autobiography, Lose my virginity. Let shame and self-loathing set in for a bit. What this charismatic human has accomplished in his 71 years on this planet is hard to understand.
Hailed as the poster child for entrepreneurial success, Mr. Branson’s spare time is spent breaking world records, participating in extreme sports, shining in the media spotlight and adding more businesses to his multinational conglomerate. , Virgin Group. In our free time, we barely managed to complete the first chapters of Rosetta Stone Spanish.
The beginnings of space tourism company Virgin Galactic Holdings (SPCE) has helped revive the popularity of sspecial pgoal apurchase vscompanies (SPACs). After the shares of SPCE started trading and it all turned into a much-discussed volatile mess, Mr. Branson accomplished one thing he does very well. He caught everyone’s attention.
In the wake of its first success story, Doctor Yes decided to attempt a SPAC IPO for a second time. A few days ago, Virgin Orbit announced a planned reverse merger with a SPAC called NextGen Acquisition Corp (NGCA).
About Virgin Orbit Stock
Founded in 2017, Richard Branson’s Virgin Orbit took over $ 1 billion funding to develop a small satellite launch company that launches rockets on a modified Boeing 747, the latter representing the “reusable” elements of the launch system. The value proposition in a nutshell is the ability to launch low cost rocket payloads from a specially modified aircraft anywhere it is allowed to fly, the primary use case being small satellites.
With two successful launches under its belt and seven satellites deployed, the Virgin Orbit team must now move towards commercializing its unique method of rocket launching which is distinguished by several factors:
- The ability to launch using a track instead of having to build a launch pad
- The ability to launch a payload into any orbit
“The only launch company that can go anytime, anywhere, in any orbit,” the company says. They also claim to compete on costs, but some do not think this is economically viable.
How do you spend so much money and get a return on your investment? And what’s more, if you’ve spent that much money and you are where you are, it might be time to rethink.
Credit: Peter Beck, Founder and CEO of Rocket Lab via Ars Technica
The above quote is taken from a very good, albeit somewhat dated, article by Ars Technica which details the history of Virgin Orbit’s business and the challenges the company has faced while spending significantly more money than other successful launch vendors. Of course, we expect Virgin Orbit’s competitors to speak loudly, but Mr Beck asks a good question. If you’re a low-cost launch provider with tight margins, how long will it take to recoup the billion dollars you’ve already invested plus the extra $ 418 you’re raising in PSPC?
Virgin Orbit’s shiny SPAC deck flouts the company’s ambitious plans to increase the income of a (check the notes again) +166% compound annual growth rate over the next five years. The same deck also includes (if you have a good magnifying glass) the statement, “We may not be able to convert our estimated contract revenue of $ 300 million or $ 3.6 billion of potential contracts into actual revenue.” No kidding. That’s why we’re only looking at the realized revenue that Virgin Orbit doesn’t have for 2020 (unless they forget to include them in the deck). We’re told the revenue will come in 2021 when roughly $ 15 million is realized – $ 5 million in “civil / commercial launch” and $ 10 million in “defense”.
Virgin Orbit’s business model
Branson’s Virgin Orbit platform makes all the sense “build it and they will come”. Where are all customers clamoring for the ability to launch satellites into unique orbits? Are there countries that want to launch rockets, but don’t have launch sites, and instead want to buy an aircraft-powered alternative? The SPAC fusion deck anticipates these questions by offering to do a bunch of things that are already being done well by other people. Mention is made of an IoT offering, something that “the one whose name must not be spoken” is already doing with their recent purchase of Swarm Technologies. Another player in the IIoT space would be a tech share we own, Trimble (TRMB). Virgin Orbit also offers an Earth observation (EO) offer, which is already done by many players.
Planet currently dominates the EO space leading all of its competitors in terms of frequency, data collected and revenue growth. Going against Planet while trying to run a profitable launch operation seems painfully difficult. Maybe the plan of “vertically integrated launch pad with a murderous use case at the end” worked for a South African man, but it’s a difficult act to pull off.
If Virgin Orbit decides to follow the leader and build bigger rockets, they’re immediately limited by what a 747 can carry. The reason companies like SpaceX and Rocket Lab are turning to bigger rockets is that it’s getting cheaper per pound to send things into space. Aside from the usefulness of being able to launch into any weird orbital setup you might think of from anywhere, what else can Virgin Orbit offer?
This brings us to the advocacy work they are getting into. Some recent contracts support the $ 10 million in defense revenue expected by Virgin Orbit for 2021.
The fact of being a defense contractor is that you are subject to the whims of the governments you serve. You also need to be naturally secretive, which means investors can never see what’s under the kimono.
Should you buy Virgin Orbit shares?
The first sign that all of this shouldn’t be taken too seriously is that no mention is made of the elephant in the room, SpaceX. Our most basic requirement would be a few lines on how Virgin Orbit plans to compete with the major launch service provider. One of their other competitors, Rocket Lab, does it in their SPAC deck, but even they don’t dare compare themselves to “you know who”.
A quick Google search shows that SpaceX launched 1,735 of its own satellites, not counting what they launched for their customers out of 126 successful rocket launches.
Leaving competition aside for a moment, the valuation at which Virgin Orbit plans to offer shares is higher than that of Mr. Branson during the that infamous Sex Pistols party. Here is our simple valuation ratio calculated on the basis of expected revenues in 2021:
- Implied market capitalization / annualized earnings
$ 3,664 million / $ 15 million = 244
While there aren’t many space stocks to choose from, we wouldn’t touch any company with a ratio above 40, let alone 244. For Virgin Orbit stocks to reach a ratio of 40, they are expected to trade at around $ 1.63 per share versus $ 10 per share they are sold to as part of the PSPC deal. It’s just a huge no from where we’re sitting.
For those of you who YOLO are switching from one meme share to another, remember that until the SPAC transaction is completed, you do not own shares of Virgin Orbit. You will have to wait for the NGCA ticker to turn into a VORB ticker.
The companies that play the supporting role behind SpaceX are just not on our space equity investment radar. That’s because the real value proposition behind SpaceX isn’t just their launch capabilities that dominate the competition. This is the value proposition we discussed in our article on The global impact of satellites and cheap launches.
Just think about how much launch bandwidth SpaceX will free up once its constellation of 30,000 satellites has launched. The demand for launch services – a commodity – is limited and there is every reason to believe that the demand could drop if StarLink is successful. If Virgin Orbit thinks it can compete with SpaceX in terms of cost, we’d like that explained a bit more.
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