For about two months, Virgin Galactic (NYSE:SPCE) was one of the hottest names on Wall Street as SPCE stocks more than quadrupled from the start of 2020 through the end of February.
Then the bottom fell out of the market due to the coronavirus from China, prompting harsh treatment of growth and momentum names. Smaller, less profitable stocks such as Virgin Galactic were particularly hard hit. Give some of the analysts that cover this name credit. Aware that SPCE stock had run too far, too fast, they hastened the stock’s tumble with some late February downgrades.
For example, Credit Suisse analyst Robert Spingarn lowered SPCE to “hold” from “buy” in late February, citing frothy multiples.
“We find ourselves no longer able to recommend [Virgin Galactic] shares after a [roughly] 185% year to date run (through 2/25) and commensurate expansion in the stock’s multiple,” said the analyst.
Morgan Stanley’s Adam Jonas made a similar call, taking the stock from a “buy” to a “hold,” based on valuation.
Even with Virgin Galactic 64% below its 52-week high, it still trades for a jaw-dropping 755 times its sales.
The Long Game
One of Virgin Galactic’s primary markets is space tourism, and there’s certainly growth to be had there. A report published by UBS last year said that high-speed space travel would eventually disrupt traditional, long-haul, passenger air travel. The firm predicted that space travel would become a $20 billion industry by 2030, with space tourism generating $3 billion by that year.
“The outlook for the space economy, space tourism and long-haul travel using space has become much more bullish,” according to UBS.
Those are compelling estimates. But even if space tourism becomes a $3 billion industry, that may not be a massive needle mover for SPCE stock because the shares already have a market capitalization of $2.9 billion. The other issue is the limited audience for space tourism due to its high cost.
It’s one thing for tech companies to make pricey aspirational products. Apple (NASDAQ:AAPL) does that with smartphones, and Tesla (NASDAQ: TSLA) does it with electric vehicles. But those companies’ products are far more attainable for “regular” people than space tourism. By some estimates, a trip to the final frontier with Virgin Galactic could cost a cool $250,000, or more than quadruple the average American salary of just over $56,500.
And as Harvard Business School notes, there are still myriad questions to be answered about the space tourism market.
“But the business reality is that we don’t really know if commercial space flight will ultimately be a money maker, how many competitors will fit in the market, or what demand will be for consumers taking off on space vacations after the initial enthusiasm wears off,” according to Harvard.
The Bottom Line on SPCE Stock
Over the near-term, Virgin Galactic faces two major issues. First, it is essentially a small-cap stock, and investors are showing disdain for such stocks,
Secondly, Virgin Galactic is a roughly $16 stock, and analysts’ average price target on the name is close to $32. Something probably has to give on that front and in this environment, it’s much easier for analysts to trim their forecasts than for stocks to double.
Space tourism and transportation have a lot of long-term allure and potential, but for investors who want to commit to Virgin Galactic for the long-haul, better pricing and valuations than today are likely to become available sooner than later.
As of this writing, Todd Shriber did not own any of the aforementioned securities. He has been an InvestorPlace contributor since 2014.