Virgin Galactic Holdings (NASDAQ:SPCE) stock has spiked over $9, or over 60%, to $24.78, within the last month, and has settled in above $23 on Tuesday. SPCE stock took off when NASA signed a deal for private space trips to the International Space Station (ISS). It’s trading at all-time highs with hopes of future profits from space travel.
Moreover, on July 15, a new CEO, Michael Colglazier, who previously worked at Disney (NYSE:DIS), joined the company and its board. Virgin Galactic said this was in preparation for the company beginning its commercialization of sub-orbital flights. The prior CEO, meanwhile, became the company’s Chief Space Officer. He left the board but will focus on future business opportunities, like the NASA deal, for Virgin Galactic.
All of that is fine and dandy. But the company still has to start making money. Otherwise, its near-$5 billion market value makes no sense. In fact, it may already reflect perfection for the company’s commercialization of space flight.
For example, taking tourists into suborbital flights for brief rides is Virgin Galactic’s existing business model. But taking astronauts to the ISS involves sending rockets into orbit at superfast speeds.
That is a completely different business, requiring a lot more capital and technology. Right now it’s not clear how Virgin Galactic is going to do this. But investors in SPCE stock seems to believe it is easily doable. Even some analysts seem to think this is no problem.
Analysts’ Expectations for SPCE Stock
One analyst group, Alembic Global Advisors, believes that SPCE is a bargain with a price target of $23 per share. They believe that the company will have EBITDA margins higher than 46% by 2023.
The analyst, Peter Skibitski, estimates that this requires “three SS2s flying and a total of around 150 or so flights/year before it is free cash flow-positive.” In addition, he believes that the company will have to do another capital raise before then.
The problem is SPCE stock is already trading above $23 per share. So a lot of good news and assumptions are already baked into the stock price.
Barron’s wrote this week after the new CEO hire that Vertical Research Partners has a $29 price target on Virgin Galactic. They see the CEO addition as a positive move, especially since the prior CEO is staying in the company.
Barron’s also says there are four analysts on the Street covering SPCE stock, with an average target price of $24.50. So far, the market seems to be willing to take these analysts at their word, since the stock is already there.
Interest in Space Widens
Some of this interest probably relates to the fact that SpaceX has recently successfully sent two astronauts to the ISS. They are still up in the ISS and are expected to return on Aug. 1 in SpaceX’s Crew Dragon capsule.
There are other space companies, like Jeff Bezos’ Blue Origin. But Virgin Galactic remains the only public company that can take people into space. However, among public companies there is one ETF, Procure Space ETF (NASDAQ:UFO) has stakes in a number of space-related stocks.
What to Do With SPCE Stock
Analysts polled by Yahoo! Finance expect the company to lose money this year and next year. Revenue estimates for this year average $2.5 million but jump significantly to over $108 million for 2021. In fact, the range of estimates for 2021 is from $65 million to over $151 million.
That shows me that no one really has a good handle on what the company’s business plan is going to produce. But think about the valuation for a second.
At $5 billion, this market capitalization for SPCE stock represents a price-to-revenue ratio of 0ver 46 times for sales over a year away. That ratio number is a high number even if it was to apply to net income, i.e., after all operating expenses are deducted.
Therefore, right now the stock seems very overvalued. Moreover, investing in the company with no real revenue and earnings, except prospectively, is speculative. Most investors will be better off waiting for a chance to buy the stock cheaper, if at all.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
