What will drive the next big rally in Virgin Galactic (NYSE:SPCE) stock? That is to say, what breadcrumb of good news will excite investors once again for this space exploration play? Earlier this month, analyst upgrades helped to put some points back into SPCE stock.
Yet, not enough to move shares (now trading for around $17 per share) back to their late July prices (around $25 per share). And, the recent high set in the summer was still far below the stock’s all-time high ($42.49 per share), hit just around the time the novel coronavirus started making headlines.
What will really move the needle? Progress regarding test flights and commercialization will spark the next move higher. The company has its next test flight set for Oct 22. The results will drive whether shares move higher (or lower) from here.
In short, all bets are off. But, given it’s impossible to predict when the next bit of good news will hit, don’t bet against Virgin. That’s not to say it’s a screaming buy. Going long today is more gamble than investment. Taking a wait-and-see approach remains the best move for now.
SPCE Stock, Analyst Upgrades and a Delayed Timeline
What’s the takeaway from recent Wall Street upgrades? Two recent analyst reports helped to boost shares this month. But, neither report says to me things have gotten better (or worse) for the company.
Firstly, the initial coverage from UBS’s Myles Walton. Walton gave shares a “buy” rating, and a $25 per share price target. Walton’s rationale? Namely, the company’s growth potential as the space tourism market takes off. Not exactly a contrarian take. Across the board, Wall Street analysts covering the stock have been bullish on SPCE stock.
Secondly, Credit Suisse’s Robert Spingarn, who also recently raised his price target from $22 per share to $24 per share. The reason? The company’s progress toward commercialization.
In the analyst’s view, as the company could enter a period of “positive news flow,” multiple expansion may be in the cards. With his “blue sky scenario,” he estimates SPCE stock could be worth as much as $43 per share in just a few years.
However, while both upgrades imply “clear skies ahead,” things may not go off without a hitch. As this commentator noted, UBS’s analysis implies there will be further commercial flight delays. It may not be until late 2021, not early 2021, that the company commences commercial flights.
And, this timeline delay isn’t the only concern out there. Many longstanding risks remain in play. These risks haven’t done much to sink shares now. But, these red flags could accelerate going forward.
Competition, Cash Burn Remain Top of Mind
As I discussed in my Aug 3 SPCE stock article, competition has, and will continue to be, a big risk. This may be the only publicly traded space tourism play out there. But, it’s far from being the only player in its industry. Elon Musk’s SpaceX has gotten a lot of press – and has raised quite a bit of capital. Another tech billionaire, Jeff Bezos, owns its other main rival, Blue Origin.
Granted, one thing this company isn’t lacking is billionaire backers. And I’m not just talking about “adventure capitalist” Richard Branson (the company’s co-founder). Tech investor Chamath Palihapitiya is a major shareholder as well.
Yet, with both rivals having even wealthier backers, there’s the risk Virgin lacks the capital to gain an edge in this space.
As InvestorPlace’s Dana Blankenhorn wrote Sept. 15, massive cash burn continues for Virgin. The company lost $120 million in the first six months of 2020 alone. Granted, cash infusions are keeping the lights on. But, with these infusions comes dilution.
If the timeline for commercialization extends further, expect more dilutive equity offerings. And, more dilution means the risk/return proposition falls more out of your favor.
Yet, while I sound bearish on SPCE stock, don’t take this to mean it’s time to go short. Investors may be lukewarm about the company right now. But, as I said above, all it’ll take is a breadcrumb of good news to send shares higher again.
Maybe not back to above $40 per share. But $25 per share to $30 per share isn’t out of reach.
No Slam-Dunk, But Don’t Bet Against It
There’s high potential here, but Virgin has its work cut out for it.
In the near-term, the results of the Oct 22 test flight will drive price action. Either good news that pushes share back above $20 per share or bad news that pushes shares back below $15 per share.
Long-term? The jury’s still out. Between continued cash needs, and high risk from better-funded competitors, it’s tough to justify buying SPCE stock at today’s levels.
Yet, while it’s not a slam-dunk, I wouldn’t bet against it, either. Any bit of good news could send shares soaring like a rocket once again.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.