Growing up I loved watching “The Jetsons” which was a futuristic animated series that was set in the year 2062 (42 years from now) and is exactly what Virgin Galactic’s (SPCE) core business vision is all about and gave me a nostalgic sense. Nevertheless, when I put on my researcher’s cap, I took on my vow to prudently evaluate the company and share my findings and perspective on the true feasibility of Virgin Galactic.
Virgin Galactic is a stock solely driven on speculation and on the pledge of a trip for those heavy-hearted adventurers on a journey of a lifetime to explore space. The dream does not end there, it goes with ado to say that SPCE eventually believes that the same technology that permits it to fly tourists to the edge of space can be used for point-to-point travel on Earth, at very high speeds either extremely high up in the atmosphere (much higher than current commercial planes go) or even potentially through space.
Catch-22 scenario: strong speculation, feeble fundamentals
Investing in space tourism requires a long-term perspective with a stomach for volatility. It is clearly not for the faint of heart. SPCE blasted off on Valentine’s day 2020 to $42.49, its 52-week high, and plummeted to $10.49 within four weeks in line with the coronavirus bear market. Since then, it’s seen both highs and lows. The stock has gained momentum once again with the announcement of SPCE’s collaboration with NASA (National Aeronautics and Space Administration) which helped push the SPCE stock up by 16% in a single day of frenzied trading.
The very next day, SPCE slumped down by 5%. Why the topsy-turvy attitude?
The NASA contract announcement did not name any price that Virgin Galactic will be paid for its services, keeping in mind that it is doubtful that Virgin will be paid handsomely for identifying and training a handful of astronauts, and even any fees it might collect for “procurement of transportation to the ISS” are not really going to be very lucrative projects. SPCE is playing the government’s interests in expanding space travel. However, bear in mind that NASA is not hiring Virgin to build spaceships capable of reaching the space station.
The current scenario: SPCE stock trades at $19.25, but why?
On Fly.com it was reported that SPCE second-quarter earnings were to report a loss of $0.25 per share (keep in mind the quarterly earnings isn’t due out until August 2020), hardly giving any reason for the share price to surge. The Fly also observed that options traders are betting that SPCE stock will go even higher so that they can one day force call options sellers to sell shares of the company at a price lower than what (they expect) the stock will sell for in a few months from now. Once again, SPCE stock is driven on speculation and is a momentum trade that we are witnessing now but then again fundamentals remain weak.
Concerns of the past
SPCE has never made a profit. However, the company has a market value of around $3.2Bn without having any material revenues or any space tourist arrivals. SPCE success rate is determined in the successful and on-time launch of Virgin Galactic’s core business area which is space tourism. The delays in execution risks are quite high due to multiple factors influencing the outcome. In 2008, eccentric billionaire Richard Branson estimated the first space flights would occur within 18 months which begs forth the question on the importance of a timeline and the real feasibility of a project that is not always in line when exploring the unknown. Thus, any timelines published by the company should be taken with a grain of salt as timelines are of a lesser priority when it comes to achieving long term success.
The launch is pivotal to justify fundamentals
InvestorPlace’s Mark Hake noted that just to break even, Virgin Galactic needs 960 people paying $250,000 per person/each year. At present, the company has almost 9,200 customers on its waiting list. For SPCE to justify its $3.2Bn market cap, the company needs to get its customers onboard a commercial flight to outer space and increase its sales. After all, the company needs to produce a profit on its financials to justify it is a viable business. From a speculation standpoint, the entity has promise, although it has virtually no revenue that makes SPCE stock difficult to value from an investment perspective.
A launch is pivotal to build confidence in the fundamentals of SPCE. Notably, SPCE is not the only company offering tourist flights. There are two other big players, namely SpaceX by Elon Musk and Blue Origin by Jeff Bezos. For now, SPCE is the only stock an investor can get a hold of as it is the only publicly traded space travel stock. However, with two other major players contending for a niche market of nearly 10,000 people, SPCE is not the most spectacular investment. By the time SPCE brings forth a feasible business model for space tourism, SpaceX and Blue Origin might be well on their way to get listed. By then, we will have options rather than settling for what is available on the market.
A ship without its captain
The Wall Street Journal reported that Branson is planning to sell 25Mn shares of his stake in Virgin Galactic to raise $486Mn cash that he would then repurpose to support his failing Virgin Atlantic airline, as well as the rest of Virgin Group’s portfolio of global leisure; holiday and travel businesses that have been affected by the unprecedented impact of COVID-19.
It is reported that this would reduce Branson’s ownership stake in Virgin Galactic to less than a 50% controlling interest, thereby effectively ending his voting control. At this point, it is next to impossible not to compare with Elon Musk who has remained completely dedicated to SpaceX during troubled times and still maintains a sizeable ownership stake while Branson was willing to sacrifice Virgin Galactic to save Virgin Atlantic. The hype is driven by Branson’s belief of Virgin Galactic to be a success and that he would fly into space on a commercial flight in 2020 which is a concomitant driver for shareholder value on SPCE. Losing that as an asset would be a huge blow for SPCE even more so as the company fundamentals remain shaky.
I believe much of the SPCE stock movement is based on hype which is why we witness greater volatility. Much of the triumph of others such as SpaceX’s successful launch of Falcon9 rocket on May 30 which supported the SPCE stock to jump as much as 10% on the first trading following the event. This establishes the fact that investors have no other stock to bet on the success of this industry other than Virgin Galatic stock. In a few years, once space travel becomes a true reality or at least when we know it’s on the verge of a breakthrough and with fundamentals backing up the investment case, Virgin Galactic might make for a sound investment. For now, we believe investors need to stay on the sidelines for a better opportunity.
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