Virgin Galactic Engineered a Quarterly Beat: Is It a Buy or Sell?

“On Wednesday [Virgin Galactic (SPCE 5.29%)] is scheduled to report its Q3 earnings, and the news won’t be great. … And yet, there’s a distinct possibility that Virgin Galactic will surprise investors to the upside.”

This was my prediction in the run-up to Virgin Galactic’s third-quarter report last week. Perhaps surprisingly — but perhaps not — it turns out that I was right on both points. On the one hand, Virgin Galactic’s earnings for the period were horrible, with the company reporting a net loss of $104 million and negative free cash flow of $105 million. On the other hand, it easily beat analyst forecasts for $1.1 million in sales for the quarter, reporting $1.7 million instead — a revenue beat.

So how did Virgin Galactic manage that?

Set the bar low, then walk right over it

To find the answer, you must travel back in time a few months to August. Virgin Galactic had just reported its second-quarter results. Its $2 million in sales had generated a $0.46 per share loss as high operating costs continued to eclipse the minuscule revenues it accrued from operating its small space tourism business.

What really upset investors in August, however, was management’s prediction that quarterly sales in Q3 and Q4 would only be approximately $1 million — half of what they were in Q2.

Mathematically, this prediction didn’t make any sense. Assuming two or three revenue-generating flights per quarter, carrying three or even four passengers paying $200,000 to $250,000 per ticket, Virgin Galactic should be reporting anywhere from $1.2 million to $3 million in revenue each quarter, not $1 million. And yet, by promising only $1 million — and convincing Wall Street to parrot this prediction — Virgin Galactic basically ensured that it would “beat expectations” in Q3.

In other words, Virgin Galactic engineered a revenue beat.

Shareholders cheered — but now what?

The results were predictable — a 33% spike in Virgin Galactic’s share price on Thursday (and only a 4% pullback afterward on Friday morning). But does Virgin Galactic deserve this reward? Will things really get better for the company?

There’s some good news on that front.

In the Q3 earnings report, Virgin Galactic gave a more realistic prediction of $3 million in revenue for Q4 — three times what it predicted three months ago. Management also confirmed that it currently has $1.1 billion in cash and equivalents, sufficient funds to build and bring into service two new Delta-class spaceplanes that will replace the company’s current single, solitary Unity-class spaceplane.

Management says the Deltas will fly weekly — so two of them flying should mean eight flights per month, versus once per month currently with Unity. The Deltas will also be able to carry six paying passengers per flight, versus a maximum of four passengers in Unity.

Multiply all the variables, and Virgin Galactic’s passenger capacity — and potential revenues — should increase by a factor of 16.

And now the bad news

That being said, it’s not all good news for this space stock. For one thing, the first Delta won’t begin flying until 2026. For another, the company will be slowing the rate of revenue-generating Unity spaceflights immediately — flying only once per quarter beginning in January, and then halting all further Unity flights mid-year. This means Unity will generate revenue for Virgin Galactic only two or three more times before being retired in mid-2024.

At that point, Virgin Galactic will be revenue-less until Delta starts flying in 2026.

The bad news doesn’t end there, either.

Consider: If Unity can only currently generate $1 million per month for Virgin Galactic, then even two Delta-class spaceplanes would only generate about $16 million per month for the company — or $48 million per quarter.

Granted, Virgin Galactic was able to reduce its operating costs to $116 million in Q3. But even if it’s able to maintain that level of spending, $48 million in quarterly revenue minus $116 million in quarterly costs still leaves Virgin Galactic losing $68 million per quarter, or about $0.18 per share.

Long story short, despite all the rejoicing over Virgin Galactic’s revenue beat in Q3, and all the hope that the new Delta-class spaceplanes will change the company’s financial picture for the better, the near term is going to look really bleak — and essentially revenue-less until 2026. And even when 2026 does arrive, Virgin Galactic still won’t be making any money. It will simply be losing money at a slower pace than it is currently.

All things considered, I’m afraid this means Virgin Galactic stock is still a sell.