What’s next for Virgin Galactic (NYSE:SPCE) stock? Shares were too hot to touch from January to mid-February. The novel coronavirus took the wind out of this highly speculative name as the space exploration company’s shares cratered during the selloff. And while shares have moved higher in recent weeks, they remain far below their pre-pandemic highs.
So, what’s the deal? Other “story stocks” rallied post-selloff. Some, like Shopify (NYSE:SHOP), now trade above where they were before the outbreak.
While previously I said shares were too speculative to buy, I’m shocked this stock hasn’t rallied higher, as “valuation doesn’t matter” has become the market’s mantra.
Perhaps I’m not giving speculators enough credit. In today’s environment, there’s plenty of reason to be cautious on Virgin Galactic. Weighing these risks against opportunity, and it makes sense why shares have held up, but have yet to retrace past highs.
Yet, that doesn’t mean shares will soon fall back again. Despite a recent failed launch, SPCE stock could go higher in the near-term. Add in the dangers of betting against “story stocks” in today’s FOMO-driven market, and it’s too risky to go short this name.
With this in mind, “staying on the sidelines” may be the best move.
Why a Failed Launch Doesn’t Matter for SPCE Stock
Simply put, this isn’t a stock you can value on fundamentals. If anything, it’s a startup that happened to go public ahead of schedule. With essentially zero revenue but plenty of cash burn, it’s going to be years before this company is profitable. So, how do we handicap such a stock? By weighing recent developments, as well as assessing the crowd’s level of love for this stock right now.
What’s the latest? The company held a launch on May 25. However, said launch was unsuccessful. Does this mean game over? Not quite. Given that maiden flights are a 50/50 situation, it’s no surprise last weekend’s launch was a bust. Add in the “teachable moments” from the failed launch, and you can spin this as a positive development.
And that’s how investors saw it pre-market May 26. Given its still early, investors may continue cutting the company some slack. But how long until SPCE stock has to start proving itself?
Probably not anytime soon. Besides the recent space launch, there’s another factor at play you can construe as a “reason to buy.” As our own Louis Navellier wrote April 21, “the demand is there” for space travel. Thousands of potential customers are registering to buy spaceflight tickets sometime down the road. Once the company turns its ambitions into reality, the company could become a highly profitable enterprise.
However, before we put pipe dreams ahead of rational investing, there are plenty of risks to consider. Between cash burn, along with two coronavirus-related issues, a lot could go wrong with this stock near-term.
3 Reasons Virgin Galactic Could Fall Back to Earth
The crowd be may less in love with SPCE stock as they were before, but the excitement’s still there. However, there are three key reasons why shares could dip further.
Firstly, there’s the cash burn problem. As InvestorPlace’s Faisal Humayun wrote May 20, last quarter’s results imply an annualized cash burn of $225 million.
The company has enough cash to last through this year. But, assuming losses continue through next year, another equity raise is highly likely. Dilution may be necessary in order to keep the lights on. But too much dilution, and investors buying in today may see less potential for their shares to appreciate long-term, as dilution impacts upside.
Secondly, a slow recovery could mean the company misses its 2021 profitability target. With a longer pathway to profits, the crowd may lose faith, sending shares back to single digits. But this isn’t the only potential coronavirus fallout.
Which brings us to the third reason. As InvestorPlace’s Chris Markoch wrote May 22, co-founder Sir Richard Branson is in a bit of a cash crunch. The outbreak has affected his myriad of travel-centric businesses.
The famed entrepreneur plans to sell 25 million SPCE shares to keep his empire afloat. Granted, Branson’s not exactly cashing out. But, what’s to say continued financial pressures won’t require him to unload more shares down the road?
Big Opportunity, But Take a “Wait-and-See” Approach
It’s tough to handicap Virgin Galactic’s near-term prospects. On one hand, heavy demand means big potential down the road. On the other hand, it’s debatable whether that demand will translate into sales, much less profitability.
With this in mind, it’s probably best not to get FOMO and chase this highly speculative stock. The best move? Take a wait-and-see approach with SPCE stock. Shares may be more of a buy if the crowd starts to panic sell.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.