Virgin Galactic: To the Thermosphere With Too Much Love

Interior of SpaceshipTwo

Photo: Virgin Galactic/Associated Press

Virgin Galactic SPCE -1.17% hasn’t proven that it can take tourists to space, yet it has already taken stock investors to the skies. Maintaining the buzz will be a struggle.

Tourism stocks have had a dismal 2020, but Virgin’s is up 66% to date. The company, founded by British billionaire Richard Branson, promises to take six passengers to experience a few minutes of weightlessness in the lower thermosphere in its cutting-edge SpaceShipTwo craft.

But second-quarter results released in early August contained disappointing news. Virgin said that its first passenger flight, which will carry Mr. Branson himself, has been pushed back from this year into 2021.

Meanwhile, the company keeps reporting big losses. For now, it only makes revenue by providing small engineering services—in the second quarter, revenues were zero. Roughly 700 customers have made prepayments on flights, but Virgin still needs cash and this month issued new shares, diluting existing investors. Those customers got a discounted ticket price of around $225,000 each, which the company says will need to go up once flights start.

Short sellers are circling, conscious that the rally can partly be explained by individual investors’ love for “sexy” companies. But those betting against the stock keep getting burned. This year, they have clocked $372 million in mark-to-market losses on Virgin, according to financial analytics firm S3 Partners.

The company has kept positive headlines coming. In July, it announced that the former head of Walt Disney’s international parks, Michael Colglazier, would become the company’s new chief executive. He has the ideal profile to lead what is essentially a thrill ride for the super rich.

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Then, former chief executive and current Chief Space Officer George Whitesides released details of an early design for a supersonic aircraft, to be developed in partnership with British manufacturer Rolls-Royce—the maker of the engines that once powered the Concorde. It would be faster than the defunct Anglo-French jet, which stopped operating in 2003.

Evolving the company’s technology to enable two-hour business flights between distant cities like New York and Sydney has been Virgin’s long-term pitch to investors. The space economy could generate $800 billion in annual revenue by 2030, while the supersonic jet gives Virgin a claim on disrupting the much larger conventional airline market. Even small slices of these two pies could justify the market’s enthusiasm.

But hoping that Virgin can develop a commercially viable aircraft—one employing very different technologies to those of SpaceShipTwo—remains an ultra-long shot for which there isn’t even a tentative time horizon. It also remains unclear whether customers want to revive the Concorde: The last 60 years have consistently shown that aviation economics revolve around making planes more fuel-efficient, not faster. Environmental concerns reinforce that trend.

In both space tourism and supersonic travel, Virgin will compete against better-resourced players, like Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin.

In the shorter term, Virgin stock is vulnerable to a sudden shift in market sentiment if bad news becomes harder to overlook. In such a complex enterprise, accidents are a potentially fatal risk: When SpaceShipTwo finally made it to space in 2018, it did so after years of setbacks, including a crash that killed a co-pilot.

On paper, Virgin Galactic’s ambitions lie within the realm of possibility. Investment cases based on too many “ifs” and “coulds,” though, have a history of making investors look like space cadets.

Billionaire CEOs Elon Musk, Jeff Bezos and Richard Branson are on a mission to send tourists to the stars. Here’s how their companies are approaching the new space race. Photo composite: Heather Seidel/The Wall Street Journal

Write to Jon Sindreu at [email protected]

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