According to its mission statement, Virgin Galactic (NYSE:SPCE) “recognizes that the answers to many of the challenges we face in sustaining life on our beautiful planet, lie in making better use of space.” While that may sound like a lofty goal which is also a catalyst for SPCE stock, on a philosophical level, it makes perfect sense. And who better to explain this than late theoretical physicist Stephen Hawking, who stated the following:
We are entering a new space age and I hope this will create a new unity. Space exploration has already been a great unifier, we seem able to cooperate between nations in space in a way we can only envy on Earth.
It’s really a profound concept. True, in space no one can hear you scream. But then again, there’s nothing to scream about: no racism, no bigotry, no violence. Perhaps some friendly competition occurs, but nothing – as far as I know – has resulted in physical confrontations there. I imagine that when you’re looking at our planet from afar, suddenly the small, petty stuff doesn’t matter anymore.
In that sense, perhaps SPCE stock is the ultimate play on environmental, social and governance (ESG) investing. As Hawking imagined, perhaps space travel is necessary for us to (literally) see the bigger picture. And who knows what we could create if we transferred some of the energy we spend on hurting each other to more productive endeavors?
As well, space exploration has tangible commercial value. Currently, we compete – and in many cases, wage wars both hot and cold – for Earth’s limited resources. But space in practical terms is infinite.
Based on the recent accomplishments of the international space community, such notions are hardly the exclusive realm of science fiction. Therefore, I understand the speculative appeal of SPCE stock. It’s fantastical in one sense, but burgeoning space-travel technology is bridging the gap between fantasy and reality.
Why You Should Still Be Skeptical About SPCE Stock
Because we’re in a crazy period in the markets during which even bankrupt organizations with little hope of recovery have occasionally produced profits for speculators, it’s easy to get drawn into Virgin Galactic’s outlook. After all, the company is associated with high-profile scientists and entrepreneurs. Further, its potential is edging a little closer to actuality.
Sure, Virgin Galactic’s third-quarter EBITDA loss, excluding certain items, of $66 million was disappointing relative to its $54 million adjusted EBIDA loss in the prior quarter. But let’s face it; many if not most investors aren’t piling into SPCE stock because of its EBITDA numbers. Instead, they’re gambling on the lofty proposition of a viable space economy.
To that end, what really matters for stakeholders and prospective buyers of the shares is news about Virgin Galactic’s next test flight, which is scheduled to occur between Nov. 19 and Nov. 23. It’s such physical evidence, not debates over granular financial metrics, that has provided SPCE stock with a rising level of support on the charts.
But regardless of the company’s pro-humanity objectives, Virgin Galactic must still convince investors that they will have a return on their capital. To meet that goal, the company is looking to ferret (rich) people into space.
To be fair, Virgin reported about 200 additional refundable deposits for its space-travel service, bringing the total number of deposits to 900. With the tickets probably going for a quarter-of-a-million a pop, that will translate into serious money.
The demand for space travel definitely exists. But the question is whether it is one-off or recurring demand. Those who are bullish on SPCE stock suggest it’s the latter. However, I’m skeptical about that.
If rich folks are willing to consistently pay $250,000 for a quick jaunt into space, why have the highest-income earners cut their spending a great deal during the still ongoing novel coronavirus pandemic? Indeed, their spending cuts were so deep, according to the New York Times that service-industry employment has been “crushed.”
So the idea that rich people will spend what amounts to the average price of a house . for a minute or so of space travel is really not a “no-brainer.”
An Unproven Business Model
While the bullish thesis for SPCE stock – rich people will splurge for anything because they can afford it – is convincing in one sense, the hard data doesn’t back it up. Spending by America’s top 25% of earners has increased “much more slowly” than that of the poorest 25%, The New York Times reported. So if we suffer a prolonged recession, Virgin Galactic’s business model could take a long-term hit.
Ultimately, I’m not going to suggest that investors should avoid speculating on SPCE stock. Certainly, the appeal of space travel will make the shares attractive to manybuyers, especially in this topsy-turvy world we’re living in. But the company’s fundamentals are too wobbly and lofty for me to feel comfortable with it.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.