How Richard Branson outpaced in space race

Becoming a public company brings much more scrutiny, and placating investors is doubly difficult when a business isn't yet generating meaningful revenue (as several start-ups backed by special purpose acquisition companies have found out).

Imagine, though, being a novice listed business trying to complete a suborbital space-travel test program in the midst of a global pandemic while two of the world's richest people, Elon Musk and Jeff Bezos, are busy advancing their own rocket endeavors. This is the competitive pressure on Virgin Galactic Holdings Inc. No wonder it's wilting.

On Monday evening Richard Branson's space tourism venture said it was reviewing the timing of its next flight test after discovering unspecified "fatigue and stress" on the airplane used to carry the spacecraft aloft. It will know next week whether this means yet another delay to the billionaire's 17-year quest to carry paying passengers to suborbital space. The shares fell 8.5 per cent in regular trading.

While Branson's ambition - and the bravery of his pilots - is admirable, the stock market tends to think in quarters not light years. With more than $600 million in cash on hand, Virgin Galactic doesn't face an immediate shortage. But Branson is reducing his stake, reliability issues are a concern and new spaceship investments are pending. The company doesn't look well enough equipped to hold its own against Musk and Bezos.

Virgin Galactic's stock almost trebled at the start of the year, helped by Cathie Wood's Ark Investment announcing a space-themed ETF. But the Robinhood crowd have since retreated as the markets have rotated out of unprofitable tech stocks. The company's share-price decline since a February peak is poised to exceed 70 per cent, although the stock is still far higher than the $10 price at which Branson agreed to take the business public in 2019 - by merging it with Chamath Palihapitiya's SPAC, Social Capital Hedosophia.

Virgin Galactic hasn't conducted a successful space flight since early 2019. A new book has shed more light on the delay-plagued test program, including worrying safety lapses in 2019. Virgin Galactic declined to comment on why these issues weren't previously disclosed to investors.

When it joined the stock exchange in 2019 it predicted commercial services would begin the following year. The first paying customer won't now fly until 2022. Analysts have had to continually revise lower their sales expectations, compared to the financials Virgin touted during the SPAC merger. It's another reminder why the financial projections that SPACs are permitted to publish shouldn't be relied upon.

Virgin Galactic has appointed a new chief executive officer, chief financial officer and head of engineering in the past 12 months. Given the technical issues, it's hard to have confidence in its plans to offer multiple daily flights, or in its ambitions to develop hypersonic aircraft for international travel.

Branson's company took advantage of its buoyant share price by tapping investors for an additional $460 million last year. It still looks like the poor relation: Musk's SpaceX has raised billions of dollars of private funding and Bezos sells about $1 billion of Amazon stock yearly to fund his space ambitions.

In contrast, Branson has sold his space stock to fund his terrestrial interests. His latest $150 million Virgin Galactic stock sale cut his stake to 24 per cent and brought the total that Virgin Group-controlled entities have cashed out since 2019 to roughly $1 billion, by my calculation - similar to his total investment in the company.

Palihapitiya netted more than $300 million by exiting personal holdings, recouping treble his initial investment. He still has indirect exposure via Social Capital Hedosophia's roughly 7 per cent stake.

Both men say they need the money for other things: Branson to support his pandemic-hit travel businesses, and Palihapitiya to help pay for a new investment. It's a bad look for two major shareholders to sell so much before Virgin Galactic has completed flight testing or received Federal Aviation Administration approval.

The ambition of becoming the first suborbital space tourism company is now in jeopardy. Bezos's Blue Origin plans to launch its first crewed mission in July and has generated huge publicity by auctioning a seat. SpaceX is already carrying astronauts to the International Space Station and has a $2.9 billion NASA contract to help land people on the Moon.

Something else separating these tycoons is that Bezos and Musk favor vertical takeoff and landing rockets, while Branson has bet on aircraft-based, horizontal takeoff and landing (a carrier jet releases the rocket-powered spacecraft at about 45,000 feet). Investors hoped this unique technological approach would prove easier to execute. The latest setback may have them thinking otherwise. (Bloomberg)