Will Virgin Orbit Stock Take Off Like a Rocket?

If you’re thinking you haven’t maximized your short time here on earth, read Sir Richard Branson’s autobiography, Losing My Virginity. Let the shame and self-loathing sink in for a bit. What this charismatic human accomplished during his 71 years on this planet is hard to fathom.

Considered the poster boy of 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 spare time, we’ve barely managed to get through the first few chapters of Rosetta Stone Spanish.

The debut of space tourism company Virgin Galactic Holdings (SPCE) helped kickstart the popularity of special purpose acquisition companies (SPACs). After SPCE shares began trading, and the whole thing turned into a much-discussed volatile mess, Mr. Branson had accomplished one thing he does really well. He got everyone’s attention.

A stock price chart for SPCE over several years
Credit: Yahoo Finance

On the coattails of his first meme stock success story, Doctor Yes decided to have a second go at a SPAC IPO. Days ago, Virgin Orbit announced a proposed reverse merger with a SPAC called NextGen Acquisition Corp (NGCA).

About Virgin Orbit Stock

Click for company website

Founded in 2017, Richard Branson’s Virgin Orbit has taken in over $1 billion funding to develop a small satellite launch company that shoots rockets off a modified Boeing 747 aircraft, 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’s allowed to fly with the primary use case being to put small satellites in space.

LauncherOne and Cosmic Girl - two components of the Virgin Orbit launch system
LauncherOne and Cosmic Girl – Credit: Virgin Orbit

With two successful launches under their belt, and seven satellites deployed, the Virgin Orbit team now needs to move towards commercializing their unique method of launching rockets that’s distinguished by several factors:

  • The ability to launch using a conventional runway instead of a launchpad
  • The ability to launch a payload into any orbit

“The only launch company that can go anytime, from anywhere, to any orbit,” says the company. They’re also claiming to compete on cost, but some don’t think that’s economically viable.

How do you spend that much money and have a return on investment? And moreover, if you’ve spent that much money and you are where you are, maybe it’s time to have a re-think.

Credit: Rocket Lab Founder and CEO Peter Beck via Ars Technica

The above quote was 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 faced while spending far more money than other successful launch providers. We would expect Virgin Orbit’s competitors to talk smack, but Mr. Beck asks a good question. For a low-cost provider of launches with tight margins, how long will it take to recoup the $1 billion they’ve plowed through already, plus the additional $418 million they’re raising in the SPAC?

The Virgin Orbit glossy SPAC deck flouts the company’s ambitious plans to grow revenues by a (checks 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 $300 million contract revenue or $3.6 billion in potential contracts into actual revenues.” No kidding. That’s why we only look at realized revenues which Virgin Orbit doesn’t have for 2020 (unless they forgot to include them in the deck). We’re told revenues arrive in 2021 when an estimated $15 million is realized – $5 million from “civilian/commercial launch” and $10 million from “defense.”

The Virgin Orbit Business Model

Branson’s Virgin Orbit platform has the whole “build it and they will come” feel to it. Where are all the customers clamoring for the ability to launch satellites into unique orbits? Are there nations that want to launch rockets, but don’t have launch sites, and want to buy an aircraft-powered alternative instead? The SPAC merger deck preempts these questions by proposing they’ll do a bunch of stuff that’s already being done well by others. There’s mention of an IoT offering, something that “him whose name shall not be spoken” is already doing with his recent purchase of Swarm Technologies. Another player in the IIoT space would be a tech stock we’re holding, Trimble (TRMB). Virgin Orbit also proposes an earth observation (EO) offering, something that’s already being done by a whole slew of players.

Virgin Orbit's proposed earth observation offering
Virgin Orbit’s earth observation offering overview – Credit: Virgin Orbit

Planet is dominating the EO space right now by leading all their competitors in imaging frequency, data gathered, data history, and revenue growth. Going against Planet while trying to run a profitable launch operation sounds painfully difficult. Maybe the “vertically integrated launch platform with killer use case at the end of it” plan will work for one South African gentleman, but it’s a tough act to pull off.

If Virgin Orbit decides to play follow-the-leader and build bigger rockets, they’re immediately limited by what a 747 can carry. The reason why companies like SpaceX and Rocket Lab are moving towards bigger rockets is because it becomes cheaper per pound to send things into space. Aside from the usefulness of being able to launch from anywhere into any weird orbital configuration one might conjure up, what else can Virgin Orbit offer?

That brings us to the defense work they’re dabbling in. Some recent contract wins support the expected $10 million in defense revenues Virgin Orbit expects for 2021.

A few national security wins for Virgin Orbit including a 10-year IDIQ contract
A few national security wins for Virgin Orbit including a 10-year IDIQ contract – Credit: Virgin Orbit

The thing about being a defense contractor is that you’re subject to the whims of the governments you serve. You also need to be understandably secretive which means investors never get to see what’s under the kimono.

Should You Buy Virgin Orbit Stock?

The first sign that this whole thing 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 other providers of launch services. One of their other competitors, Rocket Lab, does this in their SPAC deck, but even they don’t dare compare themselves to “you know who.”

A table that shows how Rocket Lab compares to other rocket launch providers like Virgin Orbit, Firefly, Relativity, and Astra
Note that Virgin Orbit has two successful launches under their belt now – Credit: Rocket Lab

A cursory Google search shows that SpaceX has launched 1,735 of their own satellites, not counting what they’ve launched for their clients over 126 successful rocket launches.

Putting the competition aside for a moment, the valuation at which Virgin Orbit plans to offer shares at is higher than Mr. Branson was during that infamous Sex Pistols party. Here’s our simple valuation ratio calculated using Virgin Orbit’s 2021 expected revenues:

  • Implied market cap / annualized revenues
    $3,664 million / $15 million = 244

Even though there aren’t many space stocks to choose from, we wouldn’t touch any company with a ratio over 40, much less one sitting at 244. For Virgin Orbit shares to reach a ratio of 40, they’d need to trade at around $1.63 a share vs. the $10 a share they’re being sold at in the SPAC transaction. It’s just a huge no from where we’re sitting.

For those of you who YOLO your way from one meme stock to the other, just remember that until the SPAC transaction is complete, you don’t hold shares of Virgin Orbit. You’ll need to wait until the ticker NGCA changes to the ticker VORB.

Conclusion

Companies that play second fiddle to SpaceX just aren’t on our space stock investment radar. That’s because the real value proposition behind SpaceX isn’t just their launch capabilities which are dominating the competition. It’s the value proposition we discussed in our piece on The Global Impact of Cheap Satellites and Launches.

Just think about how much launch bandwidth SpaceX will free up once they finish launching their 30,000 satellite constellation. There’s only so much demand for launch services – a commodity – and there’s every reason to think that demand might fall should Starlink succeed. If Virgin Orbit thinks they can compete with SpaceX on cost, we’d like to see that spelled out a bit more.

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