Virgin Galactic (NYSE:SPCE) has been a volatile holding so far in 2020. Given that this is a speculative stock, that’s to be expected. But the question becomes this: is SPCE stock worth holding now or should investors avoid the name?
That’s a tricky proposition. On the one hand, the overall market continues to experience a fair amount of volatility. And with earnings season picking up, a pandemic taking place and the election just weeks away, that volatility is no surprise.
At the same time — events aside — SPCE stock continues to trade very well. When we exclude the macro backdrop and focus solely on the price action, the name looks attractive.
In this case, we need to be aware of the macro influences, though, because Virgin Galactic doesn’t have strong enough fundamentals to fight a market-wide correction. That’s not to say it can’t buck the trend. But without significant revenue, it will be hard.
Breaking Down SPCE Stock
For what it’s worth, I really like Virgin Galactic as a longer term speculative holding. It’s got short-term obstacles, but it also possesses big-time potential. The company is just one or two flights away from completing all of its necessary Federal Aviation Administration (FAA) milestones.
And while space tourism seems like a long-off fantasy, if Virgin is successful, the company could get moving quickly. In fact, if the next two missions run smoothly, Virgin Galactic plans to send founder Richard Branson up in the first quarter of 2021. The company’s space tourism program would begin soon after that. What’s more, numerous partnerships with NASA — one of which is focused on high-speed technologies — could yield big results down the line.
The downside is that Virgin Galactic doesn’t have any meaningful revenue at this time. But this business once seemed to be years away. Now, it’s potentially here by early next year.
Adding to the confusion, there are also questions of how big of a market this could be, especially in a time dominated by the novel coronavirus. With speculative plays, though, investors need to think long-term. One analyst says the space tourism industry could be worth $38 billion per year by 2030.
For the period ending June 30, Virgin had $415.6 million in cash and no debt. That’s solid, but a larger cash buffer is more desirable when there’s no revenue and negative cash flow.
However, on Aug 10, the company priced 23.6 million shares at $19.50, raising roughly $460 million. That should help investors sleep sounder, even if means diluting the share count a bit.
Trading Virgin Galactic
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In late September, shares put in a double bottom near $15, reversed hard, then gapped higher and closed north of $20.
While SPCE stock did dip over the next few days, the 50-day moving average held as firm support. Shares continued higher, struggling with $22.50. Now, that mark is acting as support as market-wide volatility increases.
Although this name continues to trade well, we have to keep in mind that it’s a spec play. If the overall market starts to dive, it likely won’t have the same staying power as other names. Notice the correction the stock suffered in Q1 2020 as an example.
Should $22.50 break as support, it will put uptrend support (blue line) in play currently near $21.50. Below that, and SPCE stock will find all of its major moving averages — the 50-day, 100-day and 200-day moving averages — near $18.50.
I consider that a must-hold level. Not only has the 200-day proven itself in the past, but a break like this could put $15 back on the table.
Yet, so long as shares are above $21.50 to $22.50, it looks good on the long side. We need to see a rotation over the October highs at $24.37. Above puts the $27 to $28 area on the table. Above that, and the 61.8% extension is in play at $29.72.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
