Virgin Galactic (NYSE:SPCE) is one of the premier avenues for investors seeking exposure to the space travel, but that status doesn’t guarantee upside with SPCE stock.
Space is often to referred to as “the final frontier,” but the theme SPCE stock is tied to is a new frontier and with new themes come turbulence. That’s particularly true when a company isn’t profitable, has limited revenue and is hawking a good or service aimed at a small demographic – all boxes Virgin Galactic checks.
It’s not unreasonable to surmise there is demand for space travel. Some generations in the U.S. grew up when the Space Race was a centerpiece of the Cold War, and during a time when astronauts were viewed as royalty.
Others were reared on franchises such as “Star Trek” and “Star Wars.” Bottom line: Virgin Galactic has an attentive, captive audience, many of whom always wondered about what’s out there in space.
Means, Motivation Matter for SPCE Stock
It’s not breaking news that, broadly speaking, folks like to travel. The novel coronavirus pandemic is a reminder of that because the crisis is weighing heavily on traditional travel and leisure equities, including airlines, casino operators and cruise lines.
The point I’m making here is that people like to get out and see cities, states and countries they’ve previously not visited so it’s reasonable to believe some will be excited about venturing outside the Earth’s atmosphere. However, what investors need to acknowledge with Virgin Galactic is that motivation and means are two entirely different things.
While many people may want to travel to space, few can actually afford it. One ticket on a Virgin voyage to the final frontier is a whopping $250,000, or roughly five times the average income of Americans in the 35-44 age demographic.
At that price point, Virgin isn’t targeting the 1%. It’s aiming for business from the 1% of the 1%. Look at spending $250,000 on a vacation this way: It equates to 2.5% of $10 million. People worth $10 million usually don’t arrive there by making by bad financial choices, including devoting 2.5% of their net worth to a single recreational activity.
That’s a narrow demographic Virgin is targeting, setting it apart from other purveyors of disruptive technologies. For example, one of the primary reasons electric vehicle and renewable energy stocks are soaring this year is because prices for those goods are declining with data confirming lower prices lead to higher adoption.
Virgin is taking a different approach. At $250,000 per trip, it’s wagering that there are enough uber-wealthy people in the world that want to travel to space. Time will tell if that’s true or not.
Other Cards to Play
A key element in the Galactic story is that it’s the best avenue for travelers to get to space, meaning it not only provides exclusivity to customers but monopoly-like benefits to investors, too.
“We see Virgin Galactic as the only way for consumers to gain entry into the [roughly] 560 member astronaut club in the next five years,” said UBS aerospace and defense analyst Myles Walton in a recent note.
The analyst forecasts space tourism becoming a $3 billion industry by 2030, but there are avenues for growth for SPCE stock.
Space travel takes the headlines, but if the company can execute on hypersonic travel – essentially a next-generation version of the old Concord passenger jet – that could spell big opportunity.
If Galactic can eventually find avenues for trimming 20% to 30% or more of the time of lengthy, traditional passenger air travel, the opportunity for investors could be epic.
Assuming hypersonic travel comes to fruition, those tickets are going to cost more than a standard fare on an old airline, but the audience is likely massive because saving time is an investment – one many people will pay up for.
Bottom line: The real disruption offered by Virgin Galactic may just be altering the commercial airline industry, not taking a scant number of the ultra-rich to space.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
