Why We're Selling Virgin Galactic

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Virgin Galactic (NYSE: SPCE) is being sued by key partner (and Boeing subsidiary) Aurora Flight Sciences. Suffice to say that even as we want to give it the benefit of the doubt, we’re displeased enough with the aspiring commercial spaceliner to finally part ways with the stock.

Before we discuss the lawsuit, perspective is in order.

A short leash

When we added Virgin Galactic as the single smallest position in the BLI Premium Portfolio earlier this year, I acknowledged the company was a “very high-risk, but also potentially high-reward” play on the space economy.

At the same time, I’ve gone on record to state I would keep Virgin Galactic on a short leash, noting that everything must go almost exactly as planned for the company to avoid exhausting its coffers along the way.

After all, I reasoned, Virgin Galactic should have just enough cash to fund the development of its next-gen spaceships and motherships — with each designed to significantly increase the company’s flight cadence and, in turn, enable accelerated revenue growth and (eventually) sustained profitability at scale.

To that end, almost two years ago (in July 2022) Virgin Galactic struck an agreement with Boeing’s Aurora Flight Sciences to partner in the design and manufacturing of two such next-gen motherships.

As recently as five weeks ago, along with its fourth-quarter update, Virgin Galactic lauded the planned mid-2024 opening of its new Arizona spaceship factory. Management added that production for the first Delta-class spaceships “remains on track for revenue service in 2026.”

But Virgin Galactic had stayed eerily quiet all the while regarding the exact status of its next-gen motherships; in its Q4 slides, the company merely reiterated its longer-term plans to build two motherships per spaceport.

A contentious agreement

With news of the Boeing/Aurora Flight Sciences lawsuit a few days ago, however, Virgin Galactic’s relative silence now seems to speak volumes.

According to the suit, filed March 21 in the U.S. District Court for the Eastern District of Virginia, Boeing and Aurora ended work under their contract with Virgin Galactic after concluding “that it would not be possible for Virgin Galactic to produce the new Mothership Virgin Galactic wanted, on the budget available to it, on the [2025] timeline Virgin Galactic hoped to meet.”

Worse yet, Boeing and Aurora say Virgin Galactic still owes them $26.4 million from two completed task orders under the preliminary design phase of the contract. They’ve yet to resolve the dispute despite “multiple requests” for Virgin Galactic to pay.

Even worse yet, Boeing and Aurora say that Virgin Galactic is refusing to destroy proprietary information in the form of technical specifications and equations related to the designs. Virgin Galactic allegedly claims it holds intellectual property rights to that information as part of the agreement.

A lose-lose proposition

To be clear, Virgin Galactic should be considered innocent until proven guilty. So why am I selling regardless?

On one hand, if the claims of Boeing and Aurora hold true, they’re a terrible look for Virgin Galactic as it pertains to the company’s transparency with investors; not only would it imply Virgin Galactic failed to inform investors about Aurora’s precise determination that 2025 was simply too early to complete such work on the mothership at the budget Virgin Galactic had allocated — Of note: Virgin Galactic framed it at the midpoint of 2023 as a “resequencing” the mothership builds to more closely follow the Delta spaceship roadmap — but it would also show investors weren’t kept fully in the loop regarding the contentious nature of the agreement (both from a standpoint of IP retention and the apparently unpaid invoices).

On the other hand, even if the claims of Boeing and Aurora prove without merit, Virgin Galactic is still going to be stuck litigating this issue possibly for years, further draining its crucial cash cushion regardless of the outcome. Not to mention it seems unlikely that Boeing or Aurora will be willing to work further with Virgin Galactic on this project — an effort that CEO Michael Colglazier insisted back in July 2022 was “integral to scaling [Virgin Galactic’s] operations.”

The bottom line

Perhaps Virgin Galactic will prevail in the end. But this lawsuit only adds rocket fuel (in a very bad way) to the fire of what was already easily the most speculative stock in the BLI Premium Portfolio. So for now, at the end of the trading day today, we’ll be reluctantly tapping that sell button on Virgin Galactic stock so we can watch this massively frustrating story play out from the sidelines.