At a time when much of the world is on lockdown and the U.S. economy is likely in recession, most investors aren’t interested in buying the stocks of companies with unproven business models and very little revenue. Since Virgin Galactic (NYSE:SPCE) definitely has those characteristics, and the company’s longer-term outlook is extremely uncertain, investors should avoid SPCE stock at this point.
Meanwhile, my belief that most investors won’t be interested in a highly speculative stock like Virgin Galactic during an extremely turbulent time has been validated by the recent performance of SPCE stock.
The company’s shares have tumbled a huge 72% from their February highs.
Unproven Business Model Weighs on SPCE Stock
Virgin Galactic is a “space tourism” company. In other words, it will take consumers more than 50 miles above the Earth in a spaceship in exchange for a $250,000 fee. So far, the company has launched one test flight, in December 2018.
During its fourth-quarter conference call, the company reported that it had “over 600 reservations and approximately $80 million in deposits, representing over $120 million of potential revenue.”
Virgin Galactic added that it had 7,957 registrations of interest as of Feb. 23.
Since the company’s business and business model are completely new, there are many unknowns. Despite the deposits and registrations, it’s hard to know how many wealthy people will actually go through with paying $250,000 for a 90-minute ride.
And it’s also difficult to determine whether Virgin Galactic will ever be profitable. Its insurance costs alone will be astronomical, no pun intended. And finally, it’s impossible to know whether a fatal accident will destroy the company’s business. I’ll go into greater depth on that later.
Potential Side Business May Not Work
Virgin Galactic is also working on a side business. It says there are “huge opportunities” to use advanced technologies to transport people much more quickly than conventional airplanes between distant points on earth. Virgin Galactic reported that “a hypersonic vehicle” could reduce the travel time between Los Angeles and Tokyo by nine hours.
But it doesn’t sound like Virgin Galactic has made much progress on the project. Moreover, like the space business, the high-speed transport business is plagued with uncertainties. It’s difficult to know if there will be much demand for high-speed travel, which will likely be very expensive.
It’s also impossible to determine if the company could make such an endeavor profitable.
I do, however, remember that the Concorde, a supersonic plane which made transatlantic flights in 3.5 hours, was ditched by many airlines before ultimately completely disappearing. That certainly doesn’t bode well for Virgin Galactic’s idea.
One Fatal Accident Could Derail the Whole Company
I know very little about space travel, but I do know that, since 1986, two of NASA’s space shuttles have had fatal accidents.
In 1986, the Challenger disintegrated shortly after launching, killing everyone aboard and in 2003, the Columbia disintegrated after reentering the Earth’s atmosphere.
Evidently, space travel is an extremely difficult and dangerous enterprise. If one of Virgin Galactic’s spaceships blow up, killing everyone aboard, the company’s whole space tourism business will probably have to fold.
The Bottom Line on SPCE Stock
Many wealthy individuals could find the idea of traveling in space intriguing. But I don’t know how many of them will pay $250,000 for a 90-minute trip, and I certainly don’t know if Virgin Galactic will ever be able to turn a profit.
Finally, in the shorter term, the stock doesn’t seem like the type of name that investors will look to buy during a crisis or even in the immediate aftermath of a crisis.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.