Tue. Oct 26th, 2021

If you think you haven’t made the most of your little time here on earth, read Sir Richard Branson’s autobiography, Losing My Virginity. Let the shame and self-esteem sink a little. It is difficult to understand what this charismatic human achieved during his 71 years on this planet.

Considered the boy of business success, Mr. Branson’s free time is dedicated to breaking world records, participating in extreme sports, shining in the media spotlight and adding more companies to his multinational conglomerate, Virgin Group. In our free time, we have barely managed to get past the first chapters of Rosetta Stone Spanish.

The debut of the space tourism company Virgin Galactic Holdings (SPCE) helped start the popularity of sspecial ppurpose aacquisition ccompanies (SPACs). After SPCE shares started trading and it all became a hotly debated volatile mess, Mr. Branson had achieved something he does very well. It caught everyone’s attention.

A price chart of SPCE shares over several years
Credit: Yahoo Finance

In the case of his first meme success story, Dr. Yes decided to go back to SPAC. Days ago, Virgin Orbit announced a reverse merger proposal with a SPAC called NextGen Acquisition Corp (NGCA).

About Virgin Orbit Stock

Click on the company website

Founded in 2017, Richard Branson’s Virgin Orbit has taken over $ 1 billion funding to develop a small satellite launch company that fires rockets at 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 payloads of low-cost rockets from a specially modified aircraft anywhere you can fly, with the main use case being to put satellites small 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 and seven satellites deployed, the Virgin Orbit team now needs to move toward the commercialization of its unique rocket launch method that is distinguished by several factors:

  • The ability to throw using a conventional track instead of a pitcher
  • The ability to launch a payload into any orbit

“The only launch company that can go at any time, from anywhere and into any orbit,” the company says. They also claim to compete for cost, but some do not believe it is economically viable.

How do you spend so much money and recoup your investment? And besides, if you’ve spent so much money and you’re where you are, maybe it’s time to rethink.

Credit: Rocket Lab founder and CEO Peter Beck through Ars Technica

The above quote has been taken from a very good, albeit somewhat outdated, article by Ars Technica detailing the history of the Virgin Orbit business and the challenges the company faced while spending much more money than other successful launch providers. We’d expect Virgin Orbit’s competitors to speak perfectly, but Mr. Beck asks a good question. For a low-cost, narrow-margin launch provider, how long will it take to recover the $ 1 billion they have already plowed, plus the additional $ 418 million they raise in the SPAC?

Virgin Orbit’s bright SPAC cover ignores the company’s ambitious plans to increase revenue with a (check the notes again) + 166% compound annual growth rate over the next five years. The same cover also includes (if you have a good magnifying glass) the statement, “we may not be able to convert our estimated contractual revenue of $ 300 million or $ 3.6 billion into potential contracts into actual revenue.” It’s not a joke. So let’s just look at the revenue that Virgin Orbit doesn’t have for 2020 (unless they forgot to include them on the cover). Revenue is said to come in 2021 when it is estimated that $ 15 million is estimated: $ 5 million for “civilian / commercial release” and $ 10 million for “defense.”

The Virgin Orbit business model

Branson’s Virgin Orbit platform has the whole feeling of “building it and they’ll come”. Where are all the customers claiming the possibility of launching satellites into unique orbits? Are there nations that want to launch rockets, but don’t have launch sites and want to buy an engine alternative? The SPAC merger group avoids these questions by proposing that they will do a lot of things that other people are already doing well. An IoT offering is mentioned, something “the one that won’t be talked about” is already doing with its recent purchase of Swarm Technologies. Another player in the IIoT space would be a technology park we are maintaining, Trimble (TRMB). Virgin Orbit is also proposing a ground observation (EO) offer, which is already being done by a lot of players.

Earth observation offer proposed by Virgin Orbit
Virgin Orbit Earth Observation Overview – Credit: Virgin Orbit

Planet is dominating the EO space right now leading all of its competitors in image frequency, data collection, data history, and revenue growth. Going against Planet while trying to run a profitable launch operation sounds painfully difficult. Maybe the “vertically integrated launch pad with a killer use case at the end of it” plan might work for a South African gentleman, but it’s hard to carry out.

If Virgin Orbit decides to play follow the leader and build bigger rockets, they will soon be limited by what a 747 can carry. The reason companies like SpaceX and Rocket Lab are moving toward bigger rockets is because it is cheaper to pound send things into space. Aside from the usefulness of being able to launch from anywhere to any strange orbital configuration that can be evoked, what else can Virgin Orbit offer?

This brings us to the advocacy work in which they participate. Some recent contract gains support the $ 10 million defense revenue projected that Virgin Orbit expects for 2021.

Some national security victories for Virgin Orbit, including a ten-year IDIQ contract
Some national security victories for Virgin Orbit, including a ten-year IDIQ contract – Credit: Virgin Orbit

The fact that you are a defense contractor is that you are subject to the whims of the governments you serve. You also have to be understandably secretive, which means investors will never be able to see what’s under the kimono.

Need to buy Virgin Orbit shares?

The first sign that all of this shouldn’t be taken too seriously is that no mention is made of the room’s elephant, SpaceX. Our most basic requirement would be a few lines about how Virgin Orbit plans to compete with other launch service providers. One of its other competitors, Rocket Lab, does it on its SPAC platform, but they don’t even dare compare to “you know who”.

A table showing Rocket Lab's comparison with other rocket launch providers such as Virgin Orbit, Firefly, Relativity and Astra
Note that Virgin Orbit now has two successful releases at its disposal: Credit: Rocket Lab

A quick Google search shows that SpaceX has launched 1,735 of its own satellites, not counting what they have launched for their customers during 126 successful rocket launches.

Leaving aside the competition for a moment, the rating in which Virgin Orbit plans to offer shares is higher than that held by Mr. Branson during that infamous Sex Pistols party. Here is our simple valuation ratio calculated with Virgin Orbit’s projected revenue for 2021:

  • Involved market limit / annualized revenue
    $ 3,664 million / $ 15 million 244

While there aren’t many stocks of space to choose from, we wouldn’t touch any company with a ratio of over 40, let alone one sitting at 244. For Virgin Orbit shares to reach a ratio of 40, they would have to trade in the about $ 1.63 per share versus the $ 10 per share in which they are sold in the SPAC transaction. It’s just a big no from where we’re sitting.

For those of you who make your transition from one meme to another, remember that until the SPAC transaction is completed, you have no Virgin Orbit shares. You will have to wait until the NGCA ticker changes to the VORB tick.

Conclusion

Companies that play SpaceX’s second violin are simply not on our space stock investment radar. This is because the real value proposition behind SpaceX is not just its launch capabilities that dominate the competition. It is the value proposition we have discussed in our piece The overall impact of cheap launches and satellites.

Just think about how much SpaceX bandwidth will release once they launch their 30,000-constellation constellation. There is only so much demand for launch services – a commodity – and there is every reason to think that demand could fall if Starlink succeeds. If Virgin Orbit thinks they can compete with SpaceX in terms of cost, we’d love to see that explained a little more.

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