After pulling back in late October, things are looking up again for Virgin Galactic (NYSE:SPCE). Shares in the space exploration company have rocketed back well above $20 per share. But, is there enough in motion to send shares back to prior highs (over $40 per share) in the coming months?
Sure, the recent cancellation of its space test flight due to surging novel coronavirus cases may be reason for concern. But, overall, things continue to move in the right direction. With this company’s “story” still years in the making, near-term hiccups like this don’t make or break the bull case.
Yet, this isn’t the first time this highly speculative stock has seen a massive rebound. In prior instances, shares quickly gave back their gains. While this time it could be different, there’s a good chance shares selloff yet again, and fall back to between $15 and $20 per share.
With this in mind, it’s wise to buy now, or take a “wait and see” approach? It’s looking like the latter. With many hurdles the company still needs to climb, it’s easy to see the recent enthusiasm for this stock once again peter out.
What Recent News Means for SPCE Stock
The aforementioned test flight delay may be the most recent major development out of Virgin Galactic. But, as seen from the continued rally, investors remain more focused on its long-term potential rather than its near-term hiccups.
A major factor fueling its strong performance could be some of the projections the company made on its recent quarterly earnings call. Namely, the prospect that, eventually, each of its spaceports will generate $1 billion in annual revenue. Of course, so far it only has one spaceport (located in New Mexico). But, in the coming years, the company could be operating multiple spaceports. Not just in the United States, but internationally as well.
Sure, these remarks are music to investors’ ears. But, it’s not as if it’s big news that this company could eventually become a multi-billion dollar business. As our own Matt McCall discussed late last month, various analysts have noted the company’s tremendous potential market.
The issue isn’t with this company’s future, it’s with its present. That is to say, whether this company really has a shot of living up to investors’ “out of this world” expectations. And, while the company has made progress, there are many hurdles it still needs to climb.
It’s Still Far From a Slam Dunk
Investors may be cutting the company some slack after its near-term hiccup. But, this recent issue is minuscule compared to the long-term challenges it faces on the road to profitability. While it’s making the right moves, there are several hurdles it needs to climb. If it fails to overcome these challenges, shares will quickly fall back to Earth.
Firstly, the company still needs to prove space tourism will actually become a multi-billion dollar business. As InvestorPlace.com’s Josh Enomoto discussed Nov. 16, it’s still questionable whether there’s enough wealthy people willing to pay $250,000 for a quick flight into space. Yes, based on its $300 million backlog of reservations, it’s clear there’s a modicum of demand. But, all bets are off whether there’s billions in potential revenue in the long term.
Secondly, can Virgin Galactic outfox its other well-funded competitors? I’m talking about the other contenders in the “Billionare Space Race:” Elon Musk’s SpaceX, and Jeff Bezos’ Blue Origin. Sure, SPCE has not just Richard Branson, but another billionaire backer (Chamath Palihapitiya) as well. Yet, both of their respective net worths are not even close to that of either Bezos or Musk.
Thirdly, will likely future dilution impact potential gains? Sure, it has around $740 million in cash on hand. But, losses are expected to continue for several years. Additional capital raises seem inevitable. And, while dilutive share sales may be necessary to keep the lights on, this could impact the stock’s long-term upside.
In short, there are many reasons to remain cautious about Virgin Galactic. Especially as investor enthusiasm has returned in recent weeks.
Bottom Line on Virgin: Wait for a Pullback
Sure, as investors bid this stock up once again, it looks tempting to hop on the bandwagon. But, with the company still facing multiple challenges, it’s easy to see this current rally fade out. If that happens, expect shares to fall back down to prior price levels.
Bottom line: it’ll be years before this company will start producing results. Given its tendency to see-saw, buying on a pullback is the most optimal entry point. As shares climb well above $20 per share, sit things out for now with Virgin Galactic, and wait for dip before entering a position.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.