Famed gonzo journalist Hunter S. Thompson once said we shouldn’t journey through life tiptoeing around everything but rather should reach the end and “skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming, Wow what a ride!” It’s not often you get to live that sort of life while also becoming one of the richest people in the world, but somehow British business magnate Richard Branson has managed to do just that. Over the years of building his Virgin Group empire, he’s set ambitious world records like the fastest Atlantic Ocean crossing in a sailboat, the fastest crossing of the English Channel in an amphibious vehicle, and the fastest crossing of the Pacific in a hot air balloon. It’s easy to see why you’d want to invest in a risk-taker like Richard Branson, a man who details 76 near-death experiences in his autobiography Finding My Virginity. When we heard his space tourism venture, Virgin Galactic, begins trading on Monday, we had to take a closer look.

About Social Capital

Our story starts with a company we highlighted back in August 2017 called “Social Capital.” Long story short, a fellow named Chamath Palihapitiya wanted to revolutionize the traditional IPO process by establishing a holding company that was supposed to “help startups go public without an IPO,” something he referred to as “IPO 2.0.” We immediately became confused as to how this was supposed to be implemented with multiple startups, but now it’s become clear that they’re only helping one startup IPO – Richard Branson’s Virgin Galactic.

As of this coming Monday, Social Capital Hedosophia Holdings Corp (SCH) which used to trade under the ticker IPOA will now become Virgin Galactic Holding (VGH) and trade under the ticker SPCE. Prior to that, SCH was a “shell company” as defined under the Exchange Act because it had no operations and nominal assets consisting almost entirely of cash.

Here’s the rough timeline:

In Sept of 2017, SCH completed its initial public offering and raised gross proceeds of $690,000,000 before transaction costs

SCH’s management team evaluated over 250 potential business combination targets

SCH finally settled on Virgin Galactic after a few years of living off the interest from their war chest – $676.2 million as of September 9, 2019.

Following the merger, VGH will get the cash pile and SCH’s public shareholders will own one-third of VGH.

Even the most studious MBA on our research team was dumbfounded by the regulatory document for this transaction which makes Tolstoy’s War and Peace look like some light bathroom reading. So, let’s just assume that Mr. Branson acted in his own best interests and the resulting conglomeration – VGH – can now be evaluated using a forward-looking approach. Let’s start with a little bit more info on Virgin Galactic.

About Virgin Galactic

Founded in 2004, VGH has raised more than one billion in capital to become a vertically integrated aerospace company pioneering human spaceflight for private individuals and researchers. As of June 30, 2019, they had 669 employees and 155 contractors who’ve helped build SpaceShipTwo, a reusable spaceship with the capacity to carry two pilots and up to six spaceflight participants into space before returning them safely to the Earth’s surface.

In December 2018, Virgin Galactic made history by flying SpaceShipTwo to space. It was the first flight of a spaceflight system built for commercial service to take humans into space. In February 2019, they carried a crew member – in other words, a non-paying space tourist – in the cabin for the first time. The crew member was able to unbuckle her seatbelt and float around the cabin in weightlessness – another first for a commercial space vehicle and she was thereafter awarded official U.S. government commercial astronaut wings for traveling more than 50 miles above sea level. Space tourism had officially arrived. The question is, how much money can be made from it?

Space Tourism Revenues

VGH hasn’t actually generated any human spaceflight revenues yet, but they do have lots of people lining up. As of June 30, 2019, VGH had reservations for SpaceShipTwo flights from 603 customers across 60 different countries, backed by approximately $80.0 million of deposits. The SpaceShipTwo commercial launch will be in 2020 after which $120 million can be collected from pre-sold tickets. Then, they can start to proactively sell more. (They haven’t even been actively selling these reservations since 2014.) Historically, tickets were sold at a price point of up to $250,000 and VGH expects that number to increase as a function of supply (limited) and demand (lots). Here are the company’s revenue projections out until 2023:

The projections assume a June 2020 commencement of commercial operations, reaching a peak of approximately five flights per vehicle per month by 2022 with five vehicles in operation by 2023. (25 flights a month multiplied by six seats equals $37.5 million a month at a 250K ticket price or $450 million a year). As for how profitable the whole thing will be, the unit economics point to some pretty decent margins.

That’s great and all, but how big of a market are we actually looking at for space tourism?

TAM for Space Tourism

The total addressable market (TAM) for space tourism is difficult to estimate, but VGH has put together some good guesses based on what they already know. Ninety percent of existing reservation holders have a net worth of over $1.0 million, and approximately 70% have a net worth of less than $20.0 million. (Those 60 or so people with a net worth of under $1 million who plan to pony up $250k for a ride into space are definitely living up to Hunter S. Thomson’s expectations.)

In the near term, VGH expects the majority of spaceflight customers to be individuals with a net worth of $10.0 million or more. Credit Suisse Research Institute estimated that in 2018 there were approximately 1.8 million high net worth individuals globally with a net worth greater than $10.0 million and that this group of individuals was expected to grow at a compound annual growth rate of approximately 6% through 2023. So, about 2.72 million potential customers by 2023. Let’s say 1% want to become astronauts and we’re at 22,724 space tourists. Twenty-five flights a month carrying six people each puts only 1,800 souls in space per year leaving a 12-year backlog. VGH can then increase the size of their operation which will result in economies of scale which decrease the price of tickets, and increase TAM sharply:

VGH has pricing power to go the other way as well. If demand far outweighs supply, just charge people more to get in front of the queue. Throw in a strict cancellation policy that collects the majority of the fare up front in the event of a cancellation, and then offer a reduced fare for those who can fly with little notice when there’s a cancellation. Every seat will be generating revenues on every flight. There’s even room for competition, with VGH calling out Blue Origin as a primary competitor:

Other competitors are SpaceX and Boeing, the latter of which will hold 1% of shares following the transaction – and a right to have a representative attend all meetings of the board.

Conclusion

As of August 1, 2019, only 573 humans have ever traveled above the Earth’s atmosphere into space. There’s demand to belong to such an exclusive club, and plenty of people willing to pay the membership fee. For investors, it’s particularly risky given how entirely new space tourism is. The first time a ship crashes, the party is over. Given the high net worth clientele, one would assume the business model is impervious to recessions, but maybe not. When bad things happen, spending slows across the board except for sin stocks which actually outperform. As comedian W.C. Fields once said “I spent half my money on gambling, alcohol and wild women. The other half I wasted.” Here’s to hoping that an investment in Virgin Galactic Holdings isn’t money wasted.

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