As our own William White reported June 22, Virgin Galactic (NYSE:SPCE) inked a deal to handle commercial space flights for NASA. Shares soared 18% on the announcement. But, in the days since, SPCE stock dipped back to where they were pre-announcement.
So, what’s the takeaway here? Is this latest development a sign of something big around the corner? Or, is this company still a moonshot opportunity? A little from column A, a little from column B. This recent move shows that Sir Richard Branson’s company is still a viable contender in the “Billionaire Space Race.”
As I discussed previously, Elon Musk’s SpaceX is taking much of the spotlight away from Virgin. In many ways, Musk has become the new Branson. Yet, this means little in terms of which company wins, and which company loses, as this nascent industry scales up.
Yet, while it’s still early to tell which space exploration name will dominate, it’s also too early to invest in this name right now. Analysts at UBS may believe space tourism will be an $20 billion business by 2030. But, for now, expect massive cash burn to continue with this company, as it turns its ambitions into reality.
With this in mind, buying at today’s prices (around $16 per share) may not be the best move. But, if shares take a further dip, they may become a more compelling opportunity.
SPCE Stock and Recent Developments
The recently-announced NASA deal isn’t the only positive development from Virgin Galactic as of late. On June 25, the company completed a successful glide flight test in New Mexico. This isn’t exactly a major development per se. But this successful test paves the way for rocket-powered test flights.
Sure, both recent news items out of the company show it’s still moving in the right direction. But, the question for investors is, “how quickly will this development stage company turn into a moneymaker?” For now, the answer continues to be “ask again later.”
You can say “$20 billion industry in 2030” and “hundreds of $250,000 reservations” until the cows come home. Yet, as InvestorPlace’s Mark Hake discussed June 22, it’s still doubtful the company will become profitable in the next year. And, continued cash burn could drive away many in the stock today, sending prices lower.
Also, there’s the dilution factor to consider. As its cash reserves dwindle, odds are the company will have to raise more equity. In other words, expect your piece of the pie to get smaller. This will reduce your potential share price upside, if and when SPCE stock “goes to the moon,” so to speak.
On top of these concerns, there’s still the insider selling you should be worried about. Granted, much of this may already be factored into Virgin’s share price. But, it could continue to put downward pressure on the stock.
Be on the Lookout for Insider Selling
For anyone following SPCE stock right now, it’s well-known that Sir Richard Branson is in a bit of a cash crunch. With the novel coronavirus affecting his myriad of Virgin-branded businesses, he has been unloading shares in this company in order to save his empire.
Yet, that’s only one element of the story. As I discussed in my last Virgin Galactic write-up, other insiders can also now unload shares onto the public markets. If this occurs, not only will it push shares lower. It will also show that this company’s major investors do not believe there’s much upside from here.
On the other hand, we have yet to see any evidence that other large insiders are looking to take profits. SPCE’s Chairman, billionaire investor Chamath Palihapitiya, has yet to unload any shares, based on a search of his SEC filings.
I would take this as a bullish sign for this stock’s prospects. The Social Capital founder became involved when the company reverse-merged with his publicly traded SPAC (special-purpose acquisition company) late last year. Ever since, it’s been Palihapitiya, not Branson, who seems more invested in the company’s future success.
But, if Palihapitiya decides to start selling shares, take it to be a massive red flag that the company’s share price truly is “priced for perfection.”
SPCE Stock Remains a ‘Wait-and-See’ Situation
I don’t disagree that Virgin Galactic remains on track. With the recent NASA deal, and a successful glide test paving the way for rocket testing, the company is still making headway as it helps spearhead a potential multi-billion dollar industry.
Yet, as cash burn continues, and with dilution risks on the table, the risk/return proposition may not be favorable at today’s prices. With this in mind, this remains a “wait-and-see” situation. As I’ve said previously, wait for prices to retest the single-digits before entering a position.
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.