Why Virgin Galactic Costs Too Much: In Pictures – The Motley Fool
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As Yogi Berra (or Mark Twain, or physicist Niels Bohr, depending on whom you ask) famously said: “It’s difficult to make predictions, especially about the future.” And yet, predicting the future is precisely what we ask our stock market analysts to do so that we can more easily estimate the value of the stocks we want to invest in.
Problem is, sometimes those predictions are going to be wrong.
Image source: Getty Images.
Take Virgin Galactic (SPCE -10.73%), for example. A pioneer in the burgeoning field of space tourism, Virgin Galactic operates a niche service in which tourists clamber aboard a spaceplane, which is attached to an airplane, on Earth. The airplane takes off and climbs to an altitude of about 50,000 feet before releasing the spaceplane, which then ignites its rocket engine and blasts to the edge of space, giving its passengers a few minutes of weightlessness in which they can look down on our precious Blue Marble before turning around and flying back down to Earth.
How much is such an experience worth? Virgin Galactic started out offering space tourism flights for about $250,000 a ticket — before hiking its ticket price to $450,000 last year. Mind you, Virgin Galactic hasn’t actually started commercial operations allowing customers to use those space tickets. But once it gets started — maybe later this year — here’s how stock analysts believe Virgin Galactic’s revenues will grow:
Pretty impressive, huh? Indeed, these projections promise something like parabolic sales growth. There’s just one problem:
These projections for Virgin Galactic, which is just one of several companies vying to make space tourism a thing, contradict projections for the future size of the sub-orbital space tourism market as a whole.
According to these projections from “emerging technology market intelligence” service BIS Research, the entire market for sub-orbital reusable vehicles — that’s Virgin Galactic’s niche, but it also includes rivals such as Jeff Bezos’s Blue Origin — won’t exceed $294 million in revenues by 2031.
Indeed, the entire market for all companies operating all kinds of vehicles for sub-orbital space tourism doesn’t even reach $400 million by 2031. Despite this fact, analysts are somehow sticking with their predictions that Virgin Galactic alone will generate revenues nearly four times ($1.5 billion) the size of the entire market of which it’s only one part — a logical impossibility.
What conclusion should investors draw from this? Obviously, somebody is mistaken. Either BIS Research is vastly underestimating the number of tourists willing to cough up half-a-million dollars for a few minutes in space, or else the analysts telling you to buy Virgin Galactic stock are being wildly overoptimistic about this company’s chances — in which case, Virgin Galactic stock is probably overpriced.
Only time will tell who’s right and who’s wrong. In the meantime, I’d suggest would-be Virgin Galactic investors err on the side of caution. Caveat investor on this one, folks.
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