Don’t Let Short-Term Bumps Scare You Out of Virgin Galactic

Special purpose acquisition company (SPACs) stocks are surging, with electric vehicle and battery tech plays are among the biggest winners. That’s having a positive effect on Virgin Galactic (NYSE:SPCE) stock, which was one of the original SPAC success stories from earlier this year and is a futuristic vehicle play in its own right, albeit of an extraterrestrial sort.

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SPCE stock has moved back up toward its highest level in months, with shares now around $25. That’s a solid increase from its recent trading range, which had been centered in the high teens.

Interestingly, there hasn’t been a lot going on with Virgin Galactic in terms of fundamentals. The company reported earnings, but it didn’t really move the needle either way. And a key test flight has been delayed due to the novel coronavirus. So that’s not great news. However, it does little to change Virgin Galactic’s multi-year potential.

A Few Modest Setbacks

Earlier this month, Virgin Galactic announced that it lost 34 cents per share for the third quarter. This was slightly worse than expected; analysts had estimated a loss of 27 cents per share. This is not a big deal, however. Virgin Galactic isn’t yet earning revenues, so its loss is almost entirely a factor of how quickly it spends money advancing its business. As long as it is money well-spent, a larger than expected loss at this point is not a real negative.

Arguably the bigger potential issue is that Virgin Galactic had to scratch a planned launch in mid-November due to Covid-19. This is due to regulatory changes in New Mexico around the prevention of virus spread. Virgin Galactic stated:

“While these new restrictions cause us to adjust our flight schedule, we take this pause in stride and will be prepared to resume our pre-flight procedures and announce a new test flight window as soon as we can. Our team members at Virgin Galactic, our Future Astronauts, and our fans around the world remain incredibly excited for our upcoming spaceflight.”

The delayed test flight does have some negative consequences. As per the company’s most recent conference call, Virgin Galactic intends to carry equipment for the National Aeronautics and Space Administration (NASA) on this voyage, which will make this a commercial revenue-generating flight.

In addition, the test flight will be used as part of the process for securing an operating license from the Federal Aviation Administration (FAA). The FAA needs data from a rocket-powered flight to verify and validate Virgin Galactic’s operations. Thus, success in this flight is important to the bigger story, and it would be an issue if the Covid delays drag on for long.

The Long-Term Horizon

In analyzing Virgin Galactic’s story, investors should focus on a few key things. Are the company’s vehicles safe and reliable, does it have cash to reach commercial operations, and can the company sell the travel experience to the public? On the safety angle, the company still has work to do, and this flight delay doesn’t help matters. But there’s still little reason to doubt that Virgin Galactic is on the road to long-term success there.

As for cash, the company raised a ton earlier this year. It has $742 million on hand as of its last quarterly filing. That’d last around three years at the present burn rate, though I suspect spending may increase as we get closer to commercial launches getting under way. There will presumably be a lot of spending for hiring additional employees and getting the retail/customer-facing side of operations rolling.

On the other hand, Virgin Galactic is expected to start selling tickets to fly once the test flight with Richard Branson occurs in 2021, so that will help offset some capital expenditure costs. In any case, Virgin Galactic has plenty of money to fund itself through at least 2022 given its current positioning.

Finally, there’s the matter of whether people will actually want to take Virgin Galactic flights in sufficient numbers to justify this whole business. It’s always risky pioneering an entire new industry, as Virgin Galactic is doing here. However, for now, I’d say investors should give Virgin Galactic the benefit of the doubt. In particular, hiring new CEO Michael Colglazier away from Disney (NYSE:DIS) spoke to Virgin Galactic’s commitment to building a first-rate tourism operation.

SPCE Stock Verdict

It’s a bummer that Virgin Galactic delayed its November spaceflight. The coronavirus has impacted almost all businesses in one way or another this year, and now Virgin Galactic has fallen victim as well.

The good news for SPCE stock investors, however, is that this delay isn’t a big deal. From day one, anyone that has invested in Virgin Galactic has known that the company would take a while to get to commercial operations. So, a slight bump in timeline due to outside forces is hardly the end of the world.

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

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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