In 1961, President John F. Kennedy announced his ambition of "landing a man on the Moon by the end of [the 1960s], and returning him safely to the Earth." By 1969, that ambition had become a reality, but at an enormous cost to America.
In the first 12 years of NASA’s creation (1958-1969), the agency spent an inflation-adjusted $253 billion in pursuit of Kennedy’s goal. In 1966, roughly 4.4% of all US government funds went to NASA. And since then, NASA has continued to spend roughly $20 billion per year (inflation adjusted). That’s over $1 trillion spent on various space missions over the last 50 years.
And the cumulative result is that 565 people have been to space in human history. Some of these astronauts made it to space due to the efforts of international space agencies, and NASA’s goal wasn’t to maximize the number of humans in space, but that misses the point. The point is that it cost a ton of money to send the first astronauts to space. Somewhere on the scale of $10-$100 billion per person seems about right.
But now, almost 50 years since humans last landed on the moon, a trio of billionaires are preparing to send humans back into space on an unprecedented scale.
Elon Musk’s SpaceX, Jeff Bezos’ Blue Origin, and Richard Branson’s Virgin Galactic are the leading candidates to usher in the next age of space exploration. And this isn’t some far-off pipe dream, all 3 companies are planning on launching humans into space this year!
To get there, they’ve all had to rethink the design of spaceships to radically cut the cost of sending rockets to space.
For one, 50 years of computer chip innovation means the technology behind today’s rocket development and guidance systems absolutely embarasses the technology used back in 1969.
3D printed components can be made at lower costs and higher quality than any manufacturing process from the 1960s. And the cellphone in your pocket has roughly 100,000x more processing power and 1,000,000x more memory than the Apollo 11 guidance system that first sent man to the moon.
But a shift in rocket design has also enabled a steep decline in the cost to send humans to space. The transition from building single-use vehicles to re-usable vehicles means for the cost of building one rocket, many flights can be completed.
Today’s airline industry is a perfect example of a re-usable flight system. A single Boeing 747 plane can endure upwards of 35,000 flights before metal fatigue sets in. If you think your $500 plane ticket is expensive today, take a second to appreciate the 99.997% discount you receive simply because your plane can be re-used.
And thanks to this recent innovation in spaceship architecture, we’re on the cusp of a second space age. Many are already familiar with SpaceX and Blue Origin and their plans to put humans back on the moon and Mars. But I decided to write this article about Virgin Galactic because of their unique space tourism business model and because of the shortage of thoughtful Virgin Galactic analysis on the internet.
I’m going to explore Virgin Galactic’s business model, some of the risks investors must be aware of, and the potential upside of Virgin Galactic if their business model all goes to plan. For those who haven't heard of Virgin Galactic until now, I recommend reading their Fall 2019 Investor Deck before going any further.
The most obvious risk Virgin Galactic investors face is execution risk. This is true for all tech startups with grand visions for a brighter tomorrow, but it’s especially true for Virgin Galactic. That’s because Virgin Galactic is valued at over $3 billion today, and has never had any material revenues or any space tourism customers.
All of the company’s valuation is rooted in a successful and on-time launch of Virgin Galactic’s space tourism business. There is no alternative source of revenue that Virgin Galactic can fall back on if they aren’t able to run regular launches.
This execution risk goes far beyond the risks of a crash or malfunction too. There are also more subtle risks of unforeseen delays from regulators, manufacturing partners, or internal delays that slow the cadence of regular launches.
Space is hard, and the team at Virgin Galactic already recognizes the difficulty of their task at hand. In 2014, a Virgin Galactic pilot was killed when their VSS Enterprise spaceship broke apart mid-flight and crashed in the Mojave Desert.
The execution risks are high, and any timelines published by the company should be taken with a spoonful of salt. Virgin Galactic expects the first space flights to take place in the summer of 2020, but nothing is written in stone. Back in 2008, Richard Branson estimated the first space flights would occur within 18 months which in retrospect was far too optimistic.
But as my friend Richard Burton once told me, “you can’t put a timeline on true innovation”.
This isn’t some copy-cat software business that a smart college kid can whip up in his dorm room over the weekend. Nobody has ever done this before. Virgin Galactic has spent 15 years building a novel flight system to shoot regular people into space at hypersonic speeds.
There are lots of things that can go wrong, and the team isn’t going to force a half-baked product to launch just to satisfy impatient investors.
Beyond safety risks and the risk of delayed execution, Virgin Galactic will also face another significant risk in the next 5-10 years. The risk of deteriorating pricing power.
Virgin Galactic has a reservation list of over 600 customers, who have placed roughly $80 million worth of deposits. Those $80 million of deposits will translate to roughly $120 million of revenue as the company fulfills order requests.
This equates to tickets costing $200k per person, roughly in line with management’s guidance of $250k for a seat on a space flight.
But just like Virgin has lowered the cost of spaceflight from billions of dollars to hundreds of thousands of dollars, there’s a real risk that someone else lowers the cost of a spaceflight even further.
SpaceX, Blue Origin, and Boeing are already taking aim at outer space, and a successful Virgin Galactic launch could invite competition from any one of these companies or other entrants.
And looking back at history, increasing competition is the most likely long-term outcome. The Wikipedia page for “defunct US auto manufacturers” contains over a thousand entries. Transportation has always been a cut-throat, low-margin business. Cars, planes, and trains all tell the same story. High upfront cash investments, and a high probability of failure as manufacturers consolidate in pursuit of economies of scale.
To find high margin business opportunities over the long run, Virgin must not fall into the trap of competing on prices as an undifferentiated transportation business. Instead, they must use their technology to craft world-class customer experiences. It’s the best way to avoid a “race to the bottom” on prices.
World class experiences can be excellent moats to fend off competition and retain fat margins. And that’s Virgin Galactic’s vision for space. An out-of-this-world (sorry, I had to) travel experience for wealthy tourists.
Only 565 people have ever been to space - a rounding error compared to the roughly 100 billion humans that have ever inhabited earth. And Virgin Galactic wants to send up over 3,000 additional people in just their first 4 years of operation. If successful, it will blow every other luxury travel experience out of the water. But that doesn’t mean we can’t learn from other experiential businesses too.
Disney theme parks are great examples of world class experiences with large moats. Disney’s “Parks, Experiences, and Products” business line does over $26 billion in annual revenues, and contributes almost $7 billion of annual operating margin. That represents 45% of the entire company’s operating profits, and a substantial chunk of Disney’s $256 billion valuation today.
Disneyland isn’t worried about the Knotts Berry Farm across the street undercutting their prices. They’re focused on being the “Happiest Place on Earth”. Their fantastic brand name and global reputation for creating magical experiences is what allows Disney to maintain strong margins on a business with many competitors afoot.
And if Virgin Galactic is going to maintain 70% gross margins for years to come, they’ll have to replicate the magic of Disney theme parks in space. Their space flights are already being designed as week-long experiences based out of their New Mexico ‘Spaceport America’, but that’s just the start of what the Virgin Galactic team is dreaming up.
Their enigmatic founder Richard Branson is among the world’s greatest entrepreneurs, and he has been crafting the Virgin brand over 50 years into the instantly recognizable icon it is today. Everything he does is larger than life, and his ambition for Virgin Galactic is no different.
The following quote from Richard Branson describes his vision for Virgin Galactic, and the similarities to a type of “Disneyland in outer space” are unquestionable.
“Let's go 20 years forward, if all of this goes to plan, I hope that we will have a hotel in space; and in that hotel I hope we will have small spaceships that can go around the Moon - an excursion”
I’ll be the first to admit this grand vision of hotels in outer space sounds like it’s decades away from reality, but I don’t think Virgin Galactic needs that level of success to justify a $10-$50 billion valuation. $1 billion in annual revenues would probably be enough.
Especially if Virgin Galactic can pull off the 70% margins that they Chairman Chamath Palihapitiya thinks they can. Virgin Galactic could be an insanely profitable business doing $1 billion of revenue with just 4,000 to 5,000 passengers flown per year on only a handful of spaceships.
The key assumption here is that the price of a Virgin Galactic ticket to space doesn’t plummet in the next 3-5 years.
Virgin Galactic's first 600 customer deposits will generate roughly $120 million in revenue when commercial flights launch, and over 3,000 more potential customers are on a waitlist having expressed interest in a $250k space flight. So it seems likely that Virgin Galactic will be supply-constrained for the next 3-5 years, and until then their $200-$250k ticket price probably won’t change much.
So how might Virgin Galactic reach $1 billion of annual revenues through regular space flights? At 6 passengers per flight, roughly 750 flights will be required per year. Too much for a single spaceship to handle, but Virgin Galactic expects to have 5 operational spaceships by 2023.
With all 5 operating on a cycle, each spaceship would need to perform 150 flights per year. Virgin Galactic is only anticipating 55 flights per year for each spaceship by 2023, but with a few extra spaceships and improved efficiency, $1 billion of annual revenue isn’t out of the question. Again, not something that will happen tomorrow, but quite possible by the year 2024 or 2025 with a smooth manufacturing ramp and launch schedule.
And that’s Virgin Galactic’s business in a nutshell. Establishing space travel as the pinnacle of ultra-rich tourism. Beyond the next 5 years, the team is also aware of potential opportunities in hypersonic point-to-point travel and possible expansion of their space business, but those opportunities are too far away to accurately estimate their value.
Whether you're a bull or a bear, Virgin Galactic is one of the most exciting companies to go public in a long time. I have strong suspicions it will develop a cult-like investor community similar to the mob of fans that religiously follow Tesla today and Apple in 2005-2010.
But despite the exciting nature of the business, the risk of investing in a company at a $3 billion valuation with no material revenues is absurd to many investors. Fair enough. Right now management guidance is the only useful information investors can use to make decisions.
For that reason, I expect volatility to be a common theme for Virgin Galactic’s stock over the next few years, as we learn more about launch, manufacturing, and sales progress. So much of the company’s value depends on its execution over the next 6-12 months.
The spaceport is built, and the first spaceships are too. The next milestone is Richard Branson’s maiden voyage to space expected sometime this summer.