Virgin Galactic (NYSE:SPCE) stock has had a wild ride since it went public earlier this year. That’s to be expected. Virgin Galactic is the world’s first large publicly-traded space tourism company after all. Investors are having to create new mental models to figure out how to value Virgin Galactic.
Not only is the company pioneering the commercial space industry, it also has next-to-nothing in terms of present day revenues or earnings. This means that the company’s value is almost entirely based on its future potential rather than anything that it has already built today. As a result, Virgin Galactic has seen shares surge as much as 300% at one point this year, though the stock has cooled off more recently. Fortunately, for Virgin Galactic’s owners, the future just started looking significantly brighter this past week.
Virgin Galactic Promotes Disney Leader To CEO
Virgin Galactic excited investors last week with an unexpected management change. The company, effective almost immediately, will be bringing in Michael Colglazier as its new CEO. Colglazier was the long-time head of Disney’s (NYSE:DIS) International Parks division. This meant that Colglazier oversaw Disney’s parks in Paris, Hong Kong, Tokyo, and more. Before that, he headed Disney’s Anaheim park, leading a $2 billion expansion that included its Star Wars: Galaxy’s Edge themed attractions.
This is an interesting move. Previously, George Whitesides had been Virgin Galactic’s CEO for many years, and seemed competent, even if he didn’t particular thrill investors. Thus, his being replaced comes out of the blue. Whitesides isn’t leaving the company either. Instead, he’ll transition to being its Chief Space Officer. Whitesides is also exiting Virgin Galactic’s Board of Directors.
Normally, a CEO stepping down unexpectedly would be a major negative. And it still raises eyebrows now. However, assuming Whitesides voluntarily was willing to take the demotion for the greater good, this could be a tremendous boost for Virgin Galactic. Colglazier gives Virgin Galactic a ton of credibility. He ran some of the world’s most successful tourist attractions, and was in charge of huge capital projects at Disney.
It’s encouraging that he’s willing to leave behind a cushy post at Disney to take charge at a relatively unproven company like Virgin Galactic. This move should cause many of Virgin Galactic’s skeptics to reconsider the company’s commercial prospects.
Secondary Offering Incoming?
Up until the CEO news hit, Virgin Galactic stock had been in a bit of slump. There were two primary, related, reasons for this. One, traders expect Virgin Galactic to do a secondary offering soon. The company’s stock has soared since going public earlier this year. And it is still far from achieving profitability and is continuing to burn lots of cash. Thus, it makes sense to pull in more funds for the treasury while the share price is performing well.
Two, Richard Branson needs funds to short up his Virgin Atlantic airline. The airline has, like many, fallen on hard times thanks to the novel coronavirus. Virgin Atlantic just raised more than 1 billion British Pounds of rescue funding. Alas, the British government was not willing to put in any funds. Thus, all the money had to come from private sources, primarily Richard Branson himself, Branson’s Virgin Group, and minority shareholder Delta Airlines (NYSE:DAL).
With Branson injecting hundreds of millions of British Pounds into his other businesses during this crisis, it’s only logical that he’d use his successful Virgin Galactic investment as a source of funding to support the rest of his empire.
SPCE Stock Verdict
Virgin Galactic will no doubt continue to be an extremely volatile stock. Because the company doesn’t generate underlying profits or cash flow yet, there’s much less foundation under the share price. Thus, news events, such as this new CEO hiring, cause much bigger swings in the stock price than you’d see at a more mature company.
As such, it’s generally wise to avoid chasing near-term rallies in a name like Virgin Galactic. While the stock is up 25% in a few days now, it could easily drop as much in coming days and weeks.
That said, the hiring of Mr. Colglazier is a clear long-term plus for Virgin Galactic. It gives them serious credibility for the whole business model. Disney Parks is one of the best tourism businesses in the world. If their leader is willing to step into the role at the fledgling Virgin Galactic business, it speaks volumes. So there’s definitely more appeal to Virgin Galactic as a long-term holding now; just be patient as you can probably get a better entry point closer to $20/share.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.