Virgin Galactic (NYSE:SPCE) is one of the trickiest stocks out there right now. On the one hand, it has virtually no revenue; that makes SPCE stock difficult from an investment perspective. However, from a speculation standpoint, the entity has promise.
Earlier this month, the company reported its first-quarter results. Virgin Galactic reported a loss of 30 cents per share, missing estimates by 12 cents. Revenue came in at just $240,000. That missed estimates and sank significantly year-over-year.
But oddly, this isn’t a growth story. At least not yet. Let’s dig deeper as to why this may be a worthwhile speculation play for investors.
Digging Deeper on Virgin Galactic Stock
When you think of a company with virtually no revenue and all hope, the stock is generally unattractive to most investors. But SPCE stock has a surprisingly strong balance sheet.
Current assets stand tall at $536.6 million versus current liabilities of just $115.8 million. With assets almost five times larger, Virgin Galactic can easily cover its short-term obligations. Total assets of $605.5 million easily top total liabilities of $138 million too.
So, while a $3.3 billion valuation seems lofty for Galactic, at least we’re looking at a company with solid footing.
That said, the cash burn will eventually put SPCE stock in a tough spot unless management can curb spending or generate more revenue. Currently, revenue comes from engineering services, while investors are betting on future space flights for customers.
Refundable reservations climbed to more than 400 reservations. That amounts to more than $100 million in potential revenue, according to the company. Interest for flight registrations climbed by roughly 1,200, a 15% increase from the prior period.
However, it’s SPCE’s announced partnership with NASA that got investors excited.
The company is working with NASA on several health care initiatives, including solutions to help with the novel coronavirus. But this goes much deeper than that. During the conference call, management explained the partnership:
“In partnering with NASA, we will help to advance the USs efforts to produce technically feasible high Mach vehicles for potential civil applications…We are also the only team designing, building and flying a crude vehicle at over Mach 3 at the edge of hypersonic flight, providing first mover advantage.”
This is actually pretty big news and, in my opinion, where the potential really is for SPCE stock to take off.
Trading SPCE Stock
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SPCE stock is not a well-established company like Microsoft (NASDAQ:MSFT) or Amazon (NASDAQ:AMZN). In fact, this is very much a spec play. However, I would call it a strong candidate for speculation, not simply a high-risk bet.
The worst case for Virgin Galactic stock is zero. The best case is a move back through its prior highs, putting a potential 200%-plus move in play. With that in mind, let’s take a closer look at the charts.
Once SPCE stock broke out over $12 in early January, it quickly raced higher. Shares topped $40 in February, then fell precipitously amid the outbreak of Covid-19. For interested buyers, they may consider waiting for slightly better prices. That is, on a dip down toward the 200-day moving average or the former $12 breakout area.
Below $12 and bulls can justify cutting the position, helping to improve the risk/reward. Long above $12 (or a move back over $12 should this level break) keeps SPCE stock in play.
However, until Virgin Galactic clears $20, this one may struggle to maintain upside momentum. Over the May high at $21.53 and $28 is the next upside target.
Remember, SPCE stock has a high short interest near 41%. That’s a lot of sellers betting on a decline. While one could argue that there’s a high short interest for a reason — and there is, truthfully — it could also cause a painful short-squeeze if a strong rally gets going. That will force shorts to cover, adding more buyers to the mix. It’s similar to what we saw earlier this year.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Kenwell held no position in any of the aforementioned securities.
