Virgin Galactic (NYSE:SPCE) is having a fantastic start to 2021. Barely six weeks into the year, SPCE stock has a year-to-date return of over 130% through Feb. 12.
I’m not surprised about this strong start. In December, I suggested that analysts would jump on board once revenues started rolling in, helping to push its share price higher.
“[J]ust because I’m supremely confident about Virgin Galactic’s future does not mean that you should bet the farm on SPCE stock. Far from it.
“It is still a very speculative stock. Until it gets on a pathway to profitability, this isn’t an investment for your retirement account. That said, as speculative bets go, it’s one of the most exciting I can think of.”
That’s when it was trading at $33.
At around $54 presently, only those willing to hold for the long-term should consider buying at these prices. If you bought in 2020 for the long haul, I wouldn’t sell. Instead, I would wait for it to correct and then buy more.
When it comes to Richard Branson, I’m always willing to listen. Like Virgin Galactic, 23andMe is big on potential but losing money. However, it does have revenue, which is a big deal in this market.
Why Consider VGAC Over SPCE Stock?
If I could only buy one of the two stocks, there’s no question I would pick Virgin Galactic. Its commitment to commercial spaceflight totally jazzes me.
That’s not to say that 23andMe doesn’t have a little razzle-dazzle in its business model, because it does. Most people think of 23andme and other competitors like Ancestry.com because of its DNA testing to determine one’s heritage and family backgrounds.
However, it’s these three market opportunities that will take 23andMe beyond its genealogical underpinnings: U.S. Telehealth ($250-billion total addressable market, TAM), Global Prescription Drugs ($825 billion), and Pharmaceutical research and development ($190 billion).
Genetic data drives markets worth well over $1 trillion annually and 23andMe is right at the intersection of preparation meeting opportunity.
In the 2021 23andMe Investor Presentation, CEO and co-founder Anne Wojcicki said:
“I used to be an investor in healthcare companies. And the one thing that I learned when I was investing in healthcare companies was that there was this opportunity that came with human genetic information to potentially drive a whole new, personalized kind of system.
“And I saw this happen in 2003 when the genome was first sequenced. And Francis Collins came out and said healthcare’s going to dramatically change. And it’s going to dramatically change from having it be personalized, having diagnostics, being able to prevent disease, and then being able to potentially treat and cure all other diseases.”
I’m not about to pretend I understand everything about what 23andMe does behind closed doors. Still, Wojcicki makes a compelling argument about how consumers can change the healthcare industry from the outside in.
We’re talking about significant disruption. And as Ark Investment Management CEO Cathie Wood would tell you, this is where innovation really thrives.
VGAC’s Current Share Price
As Virgin Group’s Chief Investment Officer, Evan Lovell, stated in the investor presentation, the combination will have an enterprise value of $3.5 billion and over $900 million in cash on the balance sheet.
23andMe shareholders will own 81% of the company. The shareholders from the $250 million private investment in public equity (PIPE) will own 6%, VGAC shareholders will own 11%, and Virgin Group, as SPAC sponsor, the remaining 2%.
Notably, both Branson and Wojcicki will each invest $25 million in the PIPE, which indicates how confident both are in the company’s future success. They’re putting their money where their mouths are.
In 2019, 23andMe had $441 million in revenue. Due to the pandemic that fell to $305 million in 2020. Now, in 2021, despite sales falling to $218 million the company expects to lose just $9 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).
As gross margins rise from the mid 40s in 2021 to the high 50s by 2o24, it turns profitable.
Now, many SPAC combinations have tried to paint this type of picture pre-merger, only to fall flat on their faces post-combination. 23andMe is providing investors with an accurate picture of its revenue generation over the next two years.
It’s going to take one step to take two steps forward.
In early summer 2020, 23andMe was valued at $2.5 billion. In August 2020, Ancestry.com was sold for $4.7 billion. Of course, it’s worth noting that Ancestry had annual revenue of over $1 billion, more than double 23andMe’s 2019 sales.
For my money, 23andMe appears to be doing far more than tracking people’s histories, but it should be considered when buying VGAC stock. Do your due diligence on this front.
The Bottom Line on SPCE Stock
Unlike Virgin Galactic, 23andMe has a decent amount of revenue. That makes it a slightly more tangible near-term buy than SPCE.
Ten years from now, these two businesses could both be massive enterprises worth many billions. They could also be dust. That puts both of them on the more speculative spectrum.
Given SPCE’s run of late, the near-term risk-to-reward makes VGAC, in my opinion, more attractive at the moment.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.