The Success of Virgin Galactic Requires More Than a Proof of Concept

There is no shortage of opinions on Virgin Galactic (NYSE:SPCE). The stock is commonly divided into two camps. One camp believes that SPCE stock is a worthy speculative play for investors that have the patience. The other camp is more skeptical, pointing out that the company’s fortunes are tied to the wealthiest 1% of the population.

Virgin Galactic (SPCE) banner hanging on the New York Stock Exchange building to celebrate its IPO.
Source: Christopher Penler /

Put me in the latter camp. As I wrote last month, I think Virgin Galactic is a fascinating idea. It doesn’t take a great imagination to think that they could have a waiting list of billionaires who want to take their family and friends on the trip of a lifetime. But all they’ve done is a couple of test flights. In other words, they have a proof of concept. But that’s it.

On July 28, SPCE stock briefly went ballistic on a reveal of the inside of its cabin. That’s it. That was the news. But like the length of its planned space flights, the stock went down just as fast. Still, Virgin Galactic is up more than 100% in 2020 and remains a speculator’s dream.

However, before I go speculating on a stock that less than a year ago was trading for less than half of its current stock price, I need to have more than a proof of concept. And let’s be clear, we don’t even have that yet. And there are a couple of obstacles in the way.

The 1% May be Shrinking

In just a few months, America will be electing a new president. And if you believe polls, it’s not looking too good for the incumbent. So, let’s say that the presumptive Democratic nominee, Joe Biden, wins the White House. What will that mean for taxes on the wealthiest 1%?

Well, in Biden’s own words, they’re going up.

Now this is not really news. And I’m not going to offend your sensibilities by wringing my hands about the plight of the uber-rich. Nor am I going to pretend that they will actually be paying significantly higher taxes. They have a team of accountants that are probably already modeling tax strategies.

But it can’t be understated that Virgin Galactic’s “product” is not something that will be available for the average consumer. Nor even the wealthy consumer. At $250,000 a flight, it may still be a discretionary purchase, but it’s one that will be more closely scrutinized.

And don’t forget that right now the wealth gap in the country is widening. It’s not a good time for conspicuous consumption. And there really is no “need” to experience the weightlessness of space.

Safety First

I agree with many things my InvestorPlace colleague David Moadel writes. But we part company on at least one aspect of Virgin Galactic’s business model.

Moadel points out that Virgin Galactic recently hired Michael Colglazier to be its new chief executive officer (CEO). Colglazier comes to Virgin Galactic via Disney (NYSE:DIS) where he was the president and managing director at Disney Parks International.

According to Virgin Galactic Chairman Chamath Palihapitiya, Colglazier’s background “will create an amazing customer experience for our Future Astronauts as we ramp up for spaceflight operations.”

Moadel contends that a flight on Virgin Galactic will be about the experience, like a Disney theme park. And that as long as the experience is exciting and fun, then the customer base will return again and again.

And that’s where Model and I part company. The first thing that Virgin Galactic will have to ensure is that it can create, above everything else, a safe experience. Putting it as simply as I can, they have to be right every time.

An accident with a ride at a theme park can set revenue back for years. An accident with a trip to the suborbital area of space will put a company out of business. You can sign all the waivers you want. The legal fees alone will be crushing.

You Can Stay Away from SPCE Stock

First of all, if you were inclined to speculate, I think the stock is overvalued. I mean, it doesn’t have any revenue yet so traditional metrics don’t work. However, SPCE stock has climbed more than 100% for the year. It’s hard to see it going much higher in the short term.

And I can respect the position that if you wait for the proof of concept, you’ll be too late. But there are other stocks to speculate on. And right now, SPCE stock may be more than a trip to the moon on gossamer wings, but it also carries a high risk of failing to launch.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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