In the first quarter of 2020, Virgin Galactic (NYSE:SPCE) defied gravity. The stock peaked at an incredible $42.89 by late February. The impossible valuations came to a quick end when market selling accelerated. The nearly full shutdown across the United States and in Europe put an end to reckless stock buying. SPCE stock fell below $10 last month and is in danger of forging new lows ahead.
Why would investors speculate on Virgin Galactic when the company ran out of cash and reported revenue of just $530,000? It also lost $73 million in the fourth quarter.
Virgin Galactic said it had $480 million in cash in Q4. Adjusted EBITDA shrunk to a negative $55 million in the period. Despite the poor results, the company said it entered into a new contract with the Italian Air Force. It entered into a strategic partnership with Boeing (NYSE:BA), which brings $20 million worth of Boeing investments to the company. Spaceport America completed many milestones, including exercising a mission control, ground operational elements and related external contracts with suppliers.
Under its “One Small Step” initiative, the company re-opened space flight sales. This allows customers to pay a refundable $1,000 deposit to book a ticket. A confirmed spaceflight moves them to “One Giant Leap.” Here, the customer becomes part of the Virgin Galactic Future Astronaut Community.
If competitor SpaceX needed a $500 million cash raise, investors should assume that Virgin Galactic will need the same level of funding. The Q4 results do not give much useful information, other than characterizing the pre-revenue company as a typical start-up. Until it’s up and running and the reservations are converted to revenue, investors have no idea what they’re paying for SPCE stock.
On its Feb. 25 conference call, management touted its first-mover advantage. “We expect to benefit greatly from our first-mover advantage, which is reinforced by significant barriers to entry for potential new competitors supported by the substantial investment we have made in our technology and the progress we have achieved to-date.”
Erring on Side of Caution
In reality, Virgin Galactic will not ramp up revenue until next year (2021). Until then, it will have no cash flow and only operating costs. The sudden breakdown in the economy adds more uncertainties. This is due to countries doing what it takes to stop the further spread of the novel coronavirus. But those who booked reservations when they had a job may no longer have discretionary income left to afford a flight. Still, investors may assume that only those who are highly paid booked a ticket.
The sharp deterioration in SPCE stock in the last week suggests that the market is erring on the side of caution. Investors will wait for the company to start its flights in 2021. Once revenues start growing, the market may accumulate shares.
Analysts are very bullish on Virgin Galactic. The average price target from three analysts is $29.67 (according to TipRanks). Conversely, Stock Rover gave SPCE stock a value score of 17/100 (based on price-to-earnings), a quality score of 30 (based on return on invested capital), and a growth score of 24/100.
It is too soon to buy Virgin Galactic as the stock continues falling. The markets are becoming jittery and are unwilling to bet on unproven stocks. As such, keep this stock on the “maybe” list for later.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.