From the beginning of 2020 through Feb. 20, when Virgin Galactic (NYSE:SPCE) hit an all-time high of $42.49, SPCE stock had risen at a nice, gradual pace.
Since then, it’s been up on four occasions and down on eight, including the March 9 bloodbath. As I write this, SPCE is down 56% from its all-time high. With the coronavirus from China, record-low bond yields and falling oil prices all wreaking havoc on the markets, volatility has become the new norm.
Virgin Galactic might not be an appropriate bet for 99% of the investing population. But if you can handle a planeload of volatility, SPCE could very well be the next Tesla (NASDAQ:TSLA).
The Naysayers Were Wrong About Tesla
I can remember when the naysayers said that Tesla would never be able to produce enough vehicles to match the most prominent car companies in the world.
“As Tesla attempts to scale, it’s likely to discover that its internal impediments, combined with competitor responses, make it much harder than anticipated,” Thomas Bartman wrote in April 2015. “The symptoms of these problems will manifest as product launch delays, cost overruns, and higher than expected prices. Better approaches would be either to focus exclusively on a high-end niche that is too small to entice incumbents or to enter the bottom of the market with a low-price product and disruptive business model.”
Well, Bartman sort of got it right. Tesla did introduce a product at the bottom end of the electric vehicle market (Model 3). However, the author failed to grasp the persistence and resilience of its CEO, Elon Musk.
Tesla sold 367,500 vehicles in 2019, 50% more than in 2018. Not only that, it finished the fourth quarter selling 112,000, 15% more on a sequential basis. That’s a sign Tesla has figured out how to scale its manufacturing process.
In 2017, David Einhorn, a well-known hedge fund manager, said that Tesla would never be profitable.
“If the purpose of a business is to advance the future, to have science experiments and cool buzzword things, you would get into Tesla. But [CEO Elon Musk] has yet to take any money and turn it into a profitable business,” Einhorn told Bloomberg in June 2017.
Einhorn was then asked if he would rather give $20 billion to Musk or General Motors (NYSE:GM) CEO Mary Barra.
“If [the purpose of the money] is to earn a profit and return, I think you would give it to Mary Barra because GM is interested in its return on capital,” Einhorn answered.
That’s great news if you’re long. It’s not so good if you’re short its stock.
How Does This Affect SPCE Stock?
InvestorPlace analyst Louis Navellier recently discussed why he felt Virgin Galactic stock was ready to take flight. It’s important to note that his commentary was from March 2, one week before the market’s 1,000-plus point correction, but I think the heart of his argument still applies post-apocalypse.
Navellier believes that Virgin Galactic is a visionary company in much the same way Tesla is.
“I see the company as visionary. The share price, which has retraced from its peak, is reasonable for long-term investors,” Navellier wrote. “It won’t happen overnight, but I expect the naysayers to come around as Virgin Galactic proves itself as a first mover in the exciting space tourism niche.”
The article mentions 8,000 people have registered for the opportunity to spend $250,000 for a flight to space. Navellier believes the number could skyrocket as the first flight approaches later this year.
What Navellier doesn’t discuss are the commercial possibilities beyond space tourism.
“Growing a business beyond space tourism promises to generate billions of dollars in new business for Virgin Galactic in the global aviation services market,” Yahoo! Finance anchor Adam Shapiro wrote March 1. “Virgin Galactic estimates the total addressable market, TAM, is $900 billion. The spaceline, as it calls itself, plans to access the premium side of that market, which it estimates to be around $300 billion.”
For example, imagine being able to go from Los Angeles to Tokyo in just two hours. Whether you’re sending travelers or cargo on this flight, companies would likely be willing to pay up for that privilege much like they used to with the Concorde.
“This is something that I think everybody wants. Who wouldn’t want to get to go across the ocean or something significantly faster?” CEO George Whitesides told Yahoo! Finance.
Whitesides discussed the company’s plans for 2020 in late February. He was quick to point out that revenue was not the primary focus for the year. Instead the company hopes to demonstrate that it can establish a consistent flight schedule for SpaceShipTwo and subsequent vehicles to meet the consumer demand.
The Bottom Line
As someone who’s always respected Virgin Group founder Richard Branson, the fact that Virgin owns 58.7% of Virgin Galactic suggests to me that if it’s not successful commercializing space flight, it won’t be from a lack of trying.
Yes, SPCE stock is speculative at this point in its history. However, since it’s down 56% in less than a month, buying shares now is much easier to justify.
Sometimes, like Tesla, you can’t see the forest for the trees. Big-picture thinkers will want to own SPCE over the long haul. However, if the current volatility makes you ill, you have no business even considering it.
Virgin Galactic, in my opinion, is a speculative buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.