Virgin Galactic (SPCE) stock has crashed amid bankruptcy risks

Virgin Galactic (SPCE) stock price has hit what looks like its final descent as concerns about its future remain. It has plunged by 85% this year and by almost 100% from its all-time high in June 2021. 

Richard Branson’s company faces hurdles

Virgin Galactic is one of the few billionaire-backed companies that aim to disrupt the transport and tourism industry. In particular, it is aiming to be a pioneer in the space travel industry that is expected to boom in the future. 

Founded by Richard Branson in 2004, the company aims to compete with SpaceX and Blue Origin, which are backed by Elon Musk and Jeff Bezos, the two richest people in the world. 

The company has continued to incinerate funds in the last two decades. Most of these funds went to research and development (R&D) and other costs. For example, in the last five financial years, the company’s cash outflow stood at over $900 million.

Unfortunately, the company will continue burning cash in the foreseeable future. Even if everything goes as planned, Virgin Galactic will not become profitable in the next few years, meaning that it will continue to need more cash. 

Richard Branson is different from Elon Musk and Jeff Bezos. While he is still rich – with a net worth of $2.6 billion – he is not in a position to fund the company in the long term. Earlier this year, he warned that he would not extend more funding to the company. 

Current state of affairs

Virgin Galactic has worked hard over the years and built a working spaceship that Branson famously used in 2021. Recently, however, it has suspended most of its commercial flights as the workers build its higher capacity Delta Class Spaceship that it expects will start commercial service in 2026. 

This means that the company’s revenue will be limited until commercial flights start in 2026. A delay could be possible because of the industry’s complexities. 

The Delta spacecraft is based on the VSS Imagine, which Virgin Galactic completed in 2023. It is also leveraging the Iron Bird test rig to support its development. 

Virgin Galactic has a long record of missing its deadlines. When it was going public, the company estimated that it would generate $590 million in annual revenue in 2023 and an EBITDA of $274 million. Itis also expected to carry 965 passengers in 2022, generating $398 million in revenues and an EBITDA of $146 million.

The most recent results showed that it generated just $1.985 million in revenue, a big increase from the $392k it made in the same period a year earlier. It continued its loss-making streak, generating an operating loss of $111.1 million and a net loss of over $102 million. Its loss per share was 25 cents. 

Balance sheet issues remain

Virgin Galactic would have a chance of survival if it had a solid balance sheet. The recent results revealed that its cash and equivalents dropped to $195.4 million from $216 million a year earlier. It also has $34 million in restricted cash and $569 million in marketable securities. Altogether, its available cash is over $834 million. 

While these are huge sums of money, they will likely get almost depleted by 2026 when it expects to start its commercial flights. 

Unfortunately, Richard Branson has ruled out giving it more cash. Also, raising capital by selling stock is not ideal since the company has a market cap of just $144 million. Even if it converted all the equity into cash, these funds would not be enough to fund its operations before turning a profit.

Therefore, there is a risk that the company could go bankrupt as we saw with Virgin Orbit, another Richard Branson-backed company. 

Further, there are concerns about the space tourism industry and its growth trajectory. A report published earlier this year estimated that the industry was worth $848 million in 2023 and that it will hit $27 billion in 2032.

However, as a relatively new industry, these studies mostly based on assumptions, which could go wrong. We have seen these false assumptions before in industries like cannabis and solar energy.

Virgin Galactic stock price analysis

SPCE chart by TradingView

Turning to the daily chart, we see that the SPCE share price has been in a strong freefall for a long time. It dropped below the important support level at $27.31 on March 25th and then retested it on May 14th. A break and retest is a popular sign of a bearish continuation. 

The SPCE stock price has constantly remained below the 50-day moving average and the Ichimoku cloud indicator. It is also below the descending green trendline while the MACD indicator has remained below the neutral point.

Therefore, the stock will likely continue falling as sellers target the key support at $5. However, the risk of shorting is that it is a highly shorted company with a short interest of 25%, meaning that it could become part of a meme stock short squeeze.