What Branson reaching space on Virgin Galactic flight means for the future of space tourism

Bill Campbell, Paragon Intel Director of Research joined Yahoo Finance Live to break down his thoughts of the future of space tourism.

Video transcript

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ADAM SHAPIRO: It was an historic Sunday when Sir Richard Branson made history. The space tourism market is now open not yet for business because they're not going to start taking the actual passengers aboard the Virgin Galactic space plane until 2022. But what really is the space tourism market? And where do we go from here?

We still have the Blue Origin launch on the 20th coming up. So let's bring into the stream, Bill Campbell. He is Paragon Intel Director of Research. I'm glad you're here because a lot of people got very excited by what we witnessed yesterday.

And yet, you've pointed out that this market is incredibly tight, because at $250,000 a ticket, that's the cheap ticket on Virgin Galactic but not a lot of people who can afford that. So when do we get to a point where this is a company that can make money?

BILL CAMPBELL: Yeah, thanks for having me on. Well, I mean, I think what you're seeing today is really-- there's a lot of excitement leading up to this launch. And now, CEO Colglazier is really going to struggle with investor expectations that are being shifted to the fundamentals.

I mean, I think one of the bigger issues that you're also seeing today is it's being valued as a total adjustable market. But it's really a cumulative adjustable market. If you look at the total number of people that are millionaires in the world, it's about a million and a 1/2-- or sorry-- with net worths over 5 million.

But if you bring that down even further, it's only about 55% of those people are actually adventure travelers. And then you have to disqualify about another 20% of that because they may have hypertension, claustrophobia, or other health concerns where they can't actually go into space.

So we think that this total adjustable market is really somewhere between $43 to $97 billion. So it's significantly smaller than some of those multi-$100 million numbers that you're seeing from around.

EMILY MCCORMICK: And Bill, one of the other factors with Virgin Galactic from an investing perspective is that there aren't necessarily many companies that are comparable that are publicly traded. I mean, you have SpaceX and you have Blue Origin that are private companies. So as this industry matures, how do you expect that to really impact the way that investors are viewing the stock? Because again, through market close last week, it had more than doubled so far for the year to date.

BILL CAMPBELL: Well, I think when we now have private companies, particularly ones that are funded by billionaires, they don't have to generate cash at least in the near term because they're not market-facing, right? I think for even a fantasy assumption for, you know, a 55% free cash flow margin in 10 years possibly break even five years or 100% of the bull case total adjustable market, we still think that Virgin Galactic shares are overvalued by 43%.

If you look at a base case, you could say that if they get 100% of the total market, then they still have to produce somewhere between $600 billion of revenue per year, which we find highly improbable.

ADAM SHAPIRO: Well, that's the hammer hitting the nail on the head. I got a lot of noise going on in this building right now. But let me ask you, is there a potential not for SpaceX, not for Blue Origin, but for Sir Richard Branson and Virgin Galactic? Because before the pandemic, there's a lot of talk about using this craft maybe on a larger scale to shorten the distance between a New York and a Tokyo.

And it seems almost crazy, right, to go up into suborbits and then come down. But if he can do New York to Tokyo in two, three hours, doesn't that then, perhaps, create a market for a much larger audience?

BILL CAMPBELL: Well, it could. And so as part of our research process, we did talk to nine former Disney executives that worked with Colglazier for 135 years combined. And they were positive that you'd would be able to at least go into some of the revenue streams. But they don't think he would be able to create value with Virgin.

One of the issues with that hypersonic travel that you're talking about is one, the Concorde was a big disaster about 20 years ago when they finally shut it down. And there's two companies that were really on the edge of this already.

Boom Supersonic is you can say it's the leader. They won't have a commercial aircraft operation until 2029 at the earliest. And they have to spend about $8 billion total to make that. And then Virgin Group, which is you can say the parent of Virgin Galactic, they were kind of booms aircrafts, right?

And the second competitor's Aerion who just shut down in May because they said that they couldn't raise the capital to go into production that go into their next phase. So with Virgin Galactic entering that space, they will be a second place competitor at best. And you're still looking at 10-plus years until that's even somewhat commercially viable for them. And they have to raise the capital in order to get there. And we don't think that they will be able to self-fund this through the space tourism market.

EMILY MCCORMICK: And what about risks on the space regulation front and in terms of liability once commercial space tourism does begin potentially as soon as next year if Virgin Galactic does hit that timeline? Because with this being such a frontier industry, it seems like a lot on the regulatory side. It hasn't been built out yet.

BILL CAMPBELL: Well, Virgin Galactic is one of the only ones that will be regulated by the FAA too because they do fly the mothership below 60,000 feet, whereas that's the ceiling for the regulations. So they will be under a significant amount of scrutiny. And that's one issue where if there's any types of mishaps, if anything does go wrong, it won't just be the consumers that possibly back away from this. It will also be FAA that is very heavy on top of them.

And one thing to mention on CEO Colglazier-- from our interviews, the people told us that he is someone that doesn't like red tape and he does just kind of bull ahead. And he will definitely butt heads with the FAA because of this red tape.

And it's not that he doesn't pay attention to a lot of the safety factors that are out there. But the red tape will really get in the way. And it will frustrate him. And that's something that it could cause some internal issues at the company.

ADAM SHAPIRO: I just wanted to give us--

BILL CAMPBELL: --a number. Oh, sorry. I was going to say--

ADAM SHAPIRO: We just want some pretzels and soda pop on the flights going up. I got to say thank you--