February 26, 2020 / 4:33 PM / a month ago

Breakingviews - Virgin Galactic’s valuation looks stratospheric

A model of a Virgin Galactic SpaceShipTwo spacecraft is seen on the floor of the New York Stock Exchange (NYSE) as Virgin Galactic (SPCE) begins public trading in New York, U.S., October 28, 2019. REUTERS/Brendan McDermid

NEW YORK (Reuters Breakingviews) - The assumptions baked into Virgin Galactic’s nearly $7 billion enterprise value, assuming the exercise of new warrants, are out of this world. The stock price of Richard Branson’s space-tourism outfit has more than quadrupled in three months, and the EV – which deducts balance-sheet cash – has rocketed twice as fast. A new Breakingviews calculator shows something much closer to earth is merited.

The company forecasts that by 2023 it will ferry over 1,500 passengers a year on flights offering a few minutes of weightlessness. At over $350,000 a ticket by then, that’s just under $600 million in revenue. Virgin Galactic projects EBITDA margins of 46%, for a 2023 EBITDA of $274 million.

That’s if everything goes right. And even if that comes to pass, the enterprise is currently valued at roughly 25 times its own forecast EBITDA for 2023. Virgin Galactic is a unique mix of aircraft manufacturer, airline and entertainment company. But that multiple is twice as high as Boeing’s or Disney’s, and six times the measure for Southwest Airlines, according to data compiled by Refinitiv.

Unlike Virgin Galactic, these three companies have long histories of reaping profit. And in the real world, engineering challenges remain a risk and an accident or regulatory trouble could shut operations partly or completely or cause delays.

With rivals like Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin wanting a piece of space tourism, pricing may come under pressure, too. Southwest’s current EBITDA margin is an unglamorous 20%. Assume a ticket price of $250,000 and margins of 20%, and EBITDA in 2023 would be under $100 million. The company’s enterprise value as of Tuesday’s close is approaching an eye-watering 90 times that figure.

Another huge question is the size of the market. There were about 265,000 people worth over $30 million last year, Wealth-X reckons. If this figure grows 6% annually, Virgin Galactic is counting on about 0.5% of them to fly each year. But if it’s just 0.1%, about 360 people, then even at the same price and 20% margin, EBITDA drops below $20 million – and the company’s current EV looks stratospheric at nearly 400 times that.

Virgin Galactic hopes to move into businesses such as hypersonic intercontinental travel. Morgan Stanley’s optimistic case is that it captures 10% of an $800 billion market by 2040. Yet even relatively slow supersonic travel has never overcome high investment and fuel costs. Perhaps investors are hoping tourism to Mars takes off.

Run the numbers: tmsnrt.rs/2VqTYNs

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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