From a bird’s eye view, you might expect Virgin Galactic (NYSE:SPCE) to perform relatively well during this crisis. Yes, the novel coronavirus initially devastated virtually all investment sectors. And many face a cloudy future, to say the least. However, Virgin Galactic isn’t an every-man company. Instead, it caters to the uber-wealthy. Therefore, SPCE stock should have significant insulation from the troubles.
After all, tickets to enjoy a few minutes of weightlessness on the edge of space costs a quarter-of-a-million dollars per head. To put this figure into perspective – as if you needed it – this price was just below what an average house cost in the U.S. cost in the first quarter of 2009.
So, you could blast off into space for several seconds or buy a home that could last you decades. Put it that way, SPCE stock seems a ridiculous concept. Theoretically, though, with such a high entry point, Virgin Galactic doesn’t need many customers to become profitable.
Thus, the business model is exactly the opposite of say Southwest Airlines (NYSE:LUV). Instead of high volume and low margins, SPCE is going for extremely high margins (about the highest a legitimate business can hit) at necessarily low volume.
On the surface, this business model isn’t completely unrealistic. For example, the U.S. has 626 billionaires, coming in second only to China at 799 billionaires. But the key difference here is that our economy is much more balanced than China’s. We have several multi-millionaires, such as Hollywood A-listers, that can afford going into space.
Yet despite the seemingly viable consumer base, SPCE stock has been flat since the first half of April. What’s really going on with Virgin Galactic?
Behavioral Shift Among the Wealthy Clouds SPCE Stock
An affluent person isn’t always the brightest. Indeed, you don’t need to look far to recognize this point. But what every single rich person who has earned their wealth utilizes consistently is sound business principles. In other words, maximize returns while minimizing costs.
Using this principle, to really understand where SPCE stock is headed, you want to look at investments that provide insights into wealthy consumer behaviors. In my opinion, a relevant indicator is Peloton Interactive (NASDAQ:PTON). Of course, Virgin Galactic and Peloton have almost nothing to do with each other. But the way their consumers think, especially in this crisis, is surprisingly similar.
As you know, gyms, fitness centers and associated businesses have taken a hit during this pandemic. A few have even declared bankruptcy. At a time when wealthy fitness clients could boost the industry through private sessions and other catered services, they refused. Instead, the affluent are buying up Peloton fitness equipment like mad.
Not too long ago, Peloton stated that their subscriber count almost doubled. That’s impressive considering that nothing the company offers is cheap. But when you’re rich, you can afford the equipment and the monthly subscription costs because you’re still coming out ahead of the traditional fitness platform.
When you sum these trends up, you have a skyrocketing PTON price but a flat-to-declining trajectory in SPCE stock. Logically, it makes sense – just because you can afford something doesn’t mean you’ll buy it. From the numbers’ perspective, paying so much for so little doesn’t appeal to anybody.
Moreover, the New York Times corroborates this behavior shift among the rich. While every U.S. demographic has cut spending relative to pre-pandemic levels, it’s the wealthiest that cut spending the most. And this has created a negative trickle-down effect.
Virgin Galactic’s Pricing Is Unreasonable
If you need more convincing that the case for SPCE stock is not nearly as exciting as the underlying business, look at Ferrari (NYSE:RACE). Historically, Ferrari is a company that put profitability as a secondary concern. For founder Enzo Ferrari, he cared only about racing. Apparently, he begrudgingly created street cars but only to fund his racing business.
Interestingly, RACE is a picture of contrast relative to SPCE stock, with Ferrari shares putting up a strong performance in the second calendar quarter. Why is that? Well, for the rich, exotic cars are surprisingly good deals because they typically don’t depreciate as much as non-exotics. In some cases, desirable brands like Ferrari can appreciate in market value.
More importantly, like Peloton, they represent great “operational” value. For one thing, they’re both physical products you can own or resell. Second, the “dollar-for-fun” metric is no comparison, even taking into account that traveling to space is a once-in-a-lifetime opportunity.
So, until Virgin Galactic adjusts their business model to make it more reasonable – either reducing the price or extending the space travel to multiple sessions – I find the case for SPCE stock unsustainable.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.