In the space race, Virgin Galactic (NYSE:SPCE) is a contender, but recent lethargy suggests the company is more of a pretender. SPCE stock is down 1.73% over the past month, a period in which broader benchmarks and smaller companies – a relevant mention because of Virgin’s $3.12 billion market capitalization – are soaring.
A year-to-date return of nearly 33% is nothing to scoff at. However, Virgin Galactic traded above $42 in February. It closed just over $15 on June 16. Those are the type of declines that foster jitters among investors, particularly when the company in question operates in a nascent, niche industry where the payoff could be years away.
An obvious near-term headwind for Virgin Galactic is the recent success of SpaceX getting into space. SpaceX comes with the cache of being Tesla (NASDAQ:TSLA) founder Elon Musk’s baby.
With SpaceX not yet public, Virgin Galactic has the allure of being perhaps the only publicly traded pure space play, but there’s a brewing rivalry between these two firms investors need to be cognizant of.
Another recent hurdle on Virgin Galactic, though that one will dissipate, Sir Richard Branson’s Virgin Group recently giving up majority control of the space exploration company because the bigger Virgin needs cash to keep more established business afloat. In this case, it’s just bad optics Branson is a billionaire and held in high esteem for his business acumen.
There’s Still a Story With SPCE Stock
An interesting factor to consider with Virgin Galactic is that the aforementioned selloff the stock endured during the Covid-19 swoon – one where the peak-to-trough decline was roughly 75% – was probably over-exaggerated.
Perhaps it sounds trite, but this company has barely anything in the way of sales. It has no leverage to areas of the economy that are most vulnerable to the novel coronavirus pandemic, such as airlines, casinos, cruise lines or retail sales. Heck, Virgin Galactic hasn’t even taken anyone to space yet, though it’s gotten crew members close.
What this boils down to is that the company is a reservations story. As in it books revenue based on reservations would-be space travelers make in anticipation of eventually going to the final frontier. In the first quarter, Virgin Galactic posted revenue of $238,000. Sounds tiny, but that’s mostly reservation deposit accruals and when it comes to sales, there could be more on the way.
In the first three months of this year, “the company launched an initiative for tourist-astronauts to reserve a place in Galactic’s flight queue, attracting commitments for up to $100 million in sales,” reports Barron’s.
CEO George Whitesides offered some encouraging comments on the reservations situation.
“This response to our [initiative] demonstrates the appetite for our product” and complements “the strength and ongoing support of our existing customer base of 600 future astronauts who already have reservations on our spaceflights,” he said.
Another part of the Virgin Galactic story that’s not getting much attention because the investment community views this as a space stock is hypersonic air travel.
Yes, the idea of fast flights was around years with the Concord jet, but the price points never appealed to ordinary travelers. However, air travel, like so many old guard industries, is ripe for disruption.
Undoubtedly, there’s plenty of tech on a traditional carrier jet, but tangible advances haven’t been made in terms of flight times. Today, a non-stop flight from New York to Los Angeles takes almost six hours, roughly the same amount of time it took 40 years ago.
Virgin Galactic could disrupt the old airline if it can do so on a cost-effective basis. Morgan Stanley analyst Adam Jonas estimates hypersonic air travel could be worth $10 a share alone to SPCE stock and it’s unlikely that opportunity is priced in at current levels.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.