Among stocks with a market capitalization over $1 billion, Virgin Galactic (NYSE:SPCE) has been the best stock of 2020. It hasn’t been close. SPCE stock has rallied 175% in less than two months. Second-place Enphase Energy (NASDAQ:ENPH) has gained “just” 123%.
The parabolic gains in SPCE do seem like too much. Along with big moves in Tesla (NASDAQ:TSLA) — No. 3 on the year-to-date returns list — Shopify (NYSE:SHOP), and other growth names, it’s brought back memories of the dot-com bubble.
As a result, I’d expect a pullback. Shares already retreated 9% on Friday. But I wouldn’t let bubbly near-term trading obscure the long-term case for Virgin Galactic stock.
Space tourism is the future. Virgin Galactic is the only pure-play on that trend in the market — and it has a valuable first-mover advantage. That should make SPCE stock a buy at some point.
The Fundamentals
There are near-term worries in terms of valuation. Virgin Galactic has a market capitalization of $6.2 billion. Its revenue for the first nine months of 2019, according to a filing this month with the U.S. Securities and Exchange Commission, was just $3.25 million.
Even assuming growth in the fourth quarter, SPCE stock likely has a price-to-revenue multiple over 1,000x.
Of course, the stock should look expensive on trailing 12-month revenues, given that space flights haven’t begun yet. But as of Sept. 30, the company had taken only $82 million in deposits, according to that same filing.
Meanwhile, Virgin Galactic has billions of dollars in expenses on the way before profitability arrives years, if not decades, in the future.
Has SPCE Stock Run Too Far?
Beyond the fundamentals, there are reasons to question valuation. Virgin Galactic didn’t go public via the traditional initial public offering route. Rather, it merged with a special purpose acquisition company, or SPAC.
That’s not necessarily a red flag. Another SPAC, Diamond Eagle Acquisition (NASDAQ:DEAC), has been one of 2020’s best stocks. Diamond Eagle is merging with daily fantasy and sports betting provider DraftKings, another pure-play with a massive opportunity.
But unlike DEAC, investors initially yawned at Virgin Galactic’s backdoor IPO. In fact, SPCE stock actually declined once the merger between Virgin Galactic and the oddly named Social Capital Hedosophia SPAC was completed in late October.
Shares bottomed near $7 in November, not long after we first covered SPCE on my “Moneyline” podcast. They’ve since gained 391% — on basically no news.
There’s another aspect to consider. Part of the optimism toward Virgin Galactic is the opportunity for investors to invest alongside billionaire Sir Richard Branson, founder of the Virgin empire. Branson’s business acumen is almost without parallel. Yet, in the SPAC transaction, Branson gave up control of over 40% of the company for less than $700 million.
Those shares now are worth close to $3 billion. It seems highly unlikely Branson was willing to sell shares so cheaply to raise capital. Rather, it seems more likely that Branson himself didn’t believe the business as a whole was worth the $6 billion implied by the market right now.
The Case for Virgin Galactic Stock
So there’s a case for a pullback, potentially in the near term. Equities are in the red today. SPCE already, as noted, fell 9% on Friday.
That pullback could provide a long-term buying opportunity, however. After all, Virgin Galactic has an enormous runway for growth ahead.
Its association with Branson provides access to high-dollar potential customers — and a proven management team. The only competitor of note at the moment is Blue Origin, founded by Amazon (NASDAQ:AMZN) founder Jeff Bezos back in 2000. SpaceX is focusing elsewhere at the moment, while Boeing (NYSE:BA) faces distraction from its ongoing 737 Max issues.
Space tourism is the future. It’s a market that should easily be able to handle two participants. Meanwhile, as a Morgan Stanley analyst noted last year, research into space tourism could lead to the development of new hypersonic travel on Earth.
The best way to make money in this market has been to own a leader in a fast-growing industry. Virgin Galactic looks like that leader, and space tourism like a hugely attractive industry.
Patience Could Pay Off
At the very least, however, there’s simply no need to rush into SPCE stock. The stock has been exceptionally volatile — and likely will stay that way. The valuation looks stretched.
Nimble traders may find a way to make money off that volatility. Long-term investors, however, can take their time. A pure-play on space tourism should deliver returns at some point. That point, however, might not be right now.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
