I and many others had high hopes for Virgin Galactic (SPCE -1.85%), a company that offers tourist flights to near space. But one of the most exciting stocks to recently go public has failed to live up to expectations, leaving investors with a 53% decline so far this year. Can management turn the ship around, or is its business model fundamentally broken? Let's dig deeper.

A potentially massive market 

If there is one thing the space industry has, it's potential. According to Citigroup, the revenue opportunity could expand from $424 billion in 2020 to $1 trillion by 2040. And while this growth will be heavily slanted toward existing industries such as satellite manufacturing and launch services,  analysts expect combined revenue in brand-new industries, such as space tourism, to rise from zero to $101 billion over the period. 

Red stock chart crashing into the ground

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Virgin Galactic focuses on space tourism. But its suborbital flight technology could also make it an early leader in hypersonic point-to-point travel. This technology involves flying at least five times as fast as the speed of sound at high altitudes and could generate up to $800 billion in annual sales by 2040, according to Morgan Stanley analyst Nick Jonas. 

But projections should be taken with a grain of salt. And investors shouldn't fixate on Virgin Galactic's potential when its actual operating results paint a significantly different picture. 

A cash-burning business 

Virgin Galactic's business is far from self-sustaining right now. While first-quarter revenue jumped from zero to $319,000 year over year, that was from transporting research payloads and providing engineering services, not commercial space tourism. Furthermore, the company's net loss expanded from $81,277 to $91,392 because of an increase in research and development costs as it conducts intensive testing to make sure its platform is ready to safely transport paying customers.

Despite successfully transporting its founder, Sir Richard Branson, to space and back, Virgin Galactic keeps kicking the can down the road when it comes to starting regular operations. Most recently, the company pushed the timing of its first commercial flight from late 2022 to the first quarter of 2023 because of supply chain and labor constraints. The delays could expose Virgin Galactic to challenges from rising interest rates and a possible recession, which could erode demand for its $450,000 space flight tickets.

Competition is mounting 

As Virgin Galactic crawls toward commercial operations, rivals are beating it to the punch. On June 4, Jeff Bezos' Blue Origin, a private company also operating in the space tourism vertical, sent six people into suborbital flight -- its fifth human mission. And this trip follows an earlier flight in March that included five paying customers and one employee. 

Blue Origin's success erodes the first-mover advantage Virgin Galactic could have gained from pioneering a brand-new industry and could position Bezos' company as a more trusted space tourism operator. Reputation could be critical to both pricing power and attracting customers in this nascent and potentially risky industry.  

Is there anything to like here?

While Virgin Galactic faces cash burn, delayed operations, and competition, the stock isn't completely hopeless. With $1.2 billion in cash and liquid securities, it has enough runway to sustain its losses until commercial operations start -- assuming there are no more delays and costs don't increase dramatically.

Furthermore, with a market cap of just $1.7 billion, the company looks relatively cheap compared with the long-term potential analysts see in both space tourism and hypersonic travel. While Virgin Galactic stock doesn't look very appealing right now, it could be worth a closer look if management takes convincing steps to resolve its current challenges.