While Virgin Galactic Is Still a Speculative Play, It Could Move Higher

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Since late July, Virgin Galactic (NASDAQ:SPCE) stock has fallen over 3o%. Nevertheless year-to-date SPCE stock is up 42% and 56% in the past year.

Virgin Galactic (SPCE) banner hanging on the New York Stock Exchange building to celebrate its IPO.

Source: Christopher Penler / Shutterstock.com

But don’t expect this kind of performance to continue over the next year, as it is still a speculative play. Nevertheless, there are signs that the stock will move higher over the near term.

On July 21, I wrote that Virgin Galactic seemed to be priced for perfection when it was at $24.93. I felt that the company’s $5 billion market capitalization made no sense at the time. This is still true today.

For example, the average estimate for 2021 revenue by a poll of 4 analysts by Seeking Alpha shows that it will make about $39 million. But SPCE stock as a gigantic market cap of $3.84 billion. That means that it trades for a price-to-sales ratio of 98.5 times.

This stock still trades at almost 100 times revenue one year out even after falling one-third. That shows how overpriced SPCE stock still remains.

What Analysts Say About Virgin Galactic

In short, they love it. For example, Credit Suisse just came out with a report with a $24 BUY target price. They even have a “blue sky” target price of $43 per share.

The analyst talks about catalysts relating to several test flights. He believes that the company could theoretically make $381 million in EBITDA and an EV-to-EBITDA multiple of 38 times to get to that $43 price tag.

Moreover, Cowen analyst Oliver Chen came out with a $22 price target for Virgin Galactic. He thinks there is a large addressable market for commercial space flight with the high-net-worth crowd.

In fact, Marketbeat.com says that the average consensus price target from six analysts covering SPCE stock is $24.80.  This is down from $25.00 30 days ago, but up from $22.00 90 days ago.

But the company still has to start making money. Otherwise, its near-$4 billion market value makes no sense. In fact, these price targets reflect near perfection for the company’s commercialization of space flight.

For example, its business model is taking tourists into suborbital flights for brief rides. SPCE stock took off when NASA signed a deal for private space trips to the International Space Station (ISS). But taking astronauts to the ISS involves sending rockets into orbit at superfast speeds.

One Way to Tell the Stock Is Expensive

One way I use to tell if a stock is expensive is to see how popular and expensive are its near term call options. If the premiums for out-of-the-money exercise prices are very high as a percentage of the stock price then you know it is expensive.

For example, let look at the Oct. 30 options chain – one month or so form now. The bid-ask prices for the at-the-money strike price of $16.50 are $1.72 to $1.85 per contract.

That means people are willing to pay $185 for the right to buy 100 shares (i.e,., one contract) of SPCE stock at a cost of $1650 over the next 30 days. That represents an 11.2% premium (i.e., $185 divided by $1650) on the offer side.

They believe the stock will move more than 11.2% higher over the next month and are willing to put up that amount of money upfront since they think will be higher than $16.50 per share by Oct. 30.

This 11.2% premium is extremely high. Most stocks have a 1% to 3% at-the-money premium for their one-month call options. In other words, market makers think that the demand for the stock’s options is very strong. They believe there are enough suckers willing to pay an 11% premium to buy the at-the-money calls.

This tells me two things. It is possible the stock will move higher over the next month simply from strong demand for the stock. And two, SPCE stock is in high speculative demand, despite its high valuation.

What To Do With SPCE Stock

Even though this stock is highly speculative and it is likely too expensive there are signs it will move higher. First, most analysts covering the stock seem to think has a low to mid-$20 price target.

Second, the options premiums are so high, it implies market makers think there is a lot of speculative demand for the stock. At least over the next month that is the case right now.

So, in effect, this is a case of “don’t fight the tape.” I hate to say this since I am a value investor and like to point out overpriced stocks, but this one is likely to move higher at least in the short term.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/spce-stock-is-speculatively-high-but-options-imply-upside/.

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