Image Source: Virgin Galactic Investor Presentation – Fall 2019
For many years, the frontier of space has teased the imagination of backyard stargazers and science fiction fans. Well, you can now count Wall Street investors among this group of space enthusiasts.
Space industry stocks have been in high demand in 2020, and Virgin Galactic has been the main topic of conversation among analysts from Credit Suisse to Morgan Stanley. At the moment, it appears this bauble of billionaire Richard Branson is drawing serious interest as the first-to-market space tourism stock.
“Lately, we are having more conversations on SPCE than any other US stock in our coverage with the possible exception of Tesla,” Morgan Stanley analyst Adam Jonas told CNBC. “We have witnessed a materially greater frequency of incoming queries from investors to understand the pitch and learn more about the company’s role in the rapidly evolving space economy,” he added.
High Octane Price Swings
The high-profile company has seen its share price increase dramatically over the last two months. On December 5, 2019, the stock closed at $7.22 per share, and it closed Tuesday, January 28, 2020, at $17.97, amounting to an increase of nearly 150% in that period.
A potential driver for this upward swing is that the company reached a significant construction milestone for its second spacecraft in early January. At the Mojave Air & Space Port, surrounded by employees, the company deployed the landing gear on its newest suborbital spaceplane enabling the craft to carry its own weight. Photos of the “weight on wheels” achievement spread across the internet.
“Achieving ‘weight on wheels’ for the company’s second spaceship is seen as an important milestone and seemed to trigger a further re-rating of the shares,” Jonas said.
Virgin Galactic’s second vehicle reached this construction milestone “considerably faster” than its first spaceship, VSS Unity, which is currently conducting flight tests.
Speculation Odyssey 2020
What makes Virgin Galactic so interesting is that it is pursuing a truly one of a kind endeavor—commercial space exploration with reusable spaceflight systems. Its unique business model, however, makes it a black box for valuation.
Image Source: Virgin Galactic Investor Presentation – Fall 2019
“It’s really the only stock like this,” Renaissance Capital strategist Matt Kennedy said. “If SpaceX were public then [Virgin Galactic] would be valued against them, so if it had a close peer you’d think they would trade closer together. This stock is kind of unbounded.”
Virgin Galactic is at the “vanguard of a new industry” and an exciting opportunity in a space where public investment is scarce. Credit Suisse summarized the investment thesis as a “classic tech-driven, high demand, low supply story with high barriers to entry” and as “the ultimate joyride.” Additionally, until the launch of Blue Origin, the company has a monopoly on space tourism.
On the other hand, much of the current valuation of the company is speculation. Presently, Virgin Galactic has no profits, only losses. Company leadership stated that commercial space flights would commence around May of this year. Sir Branson will be the first passenger, but the company has more than 600 reservations at $250,000 per person, representing an estimated $80 million in total collected deposits and over $120 million in total potential revenue, according to its Q3 2019 financial results. The company froze ticket sales in 2014 after the VSS Enterprise crash that killed co-pilot Michael Alsbury. Virgin Galactic recently said it might reopen ticket sales and even raise prices.
We believe much of Virgin Galactic’s success might depend on meeting timelines, keeping pace with construction milestones and passing safety tests by the FAA. In a September 2019 investor presentation, the company said it expects to have a fleet of five SpaceShip Two spaceplanes by 2023, a production rate of one per year. In the end, it is all about reaching the final frontier.
“We believe the greatest single catalyst would be successful completion of the first commercial flight,” Credit Suisse analyst Robert Spingarn said. “From here, losses should dissipate rapidly as flight activity rises.”
Goodbye Fundamentals, Hello Curiosity
Still, there is something more to why the company is so appealing. In a sense, Virgin Galactic encompasses not only the financial potential of spacefaring tourism but also the hope and wonder that space elicits in the human mind. Just read this passage from its 8-K.
We have embarked into this commercial exploration journey with a mission to put humans into space and return them safely to Earth on a routine and consistent basis. We believe the success of this mission will provide the foundation for a myriad of exciting new industries…We intend to offer our customers, also referred to as Future Astronauts, a unique, multi-day experience culminating in a spaceflight that includes several minutes of weightlessness and views of Earth from space.
Virgin Galactic is a company delivering regular citizens to space. Nobody is buying the stock today on fundamentals. Down-to-Earth assessments have gone out the window. Investors are following the stock based on the wonder of outer space. Can you blame them?
The company will announce Q4 2019 results on February 25, 2020, after the market closes. A conference call is scheduled for 5pm ET that day.
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Equities Contributor: Stephen L. Kanaval
Source: Equities News
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