For quite some time, I’ve been skeptical about Virgin Galactic (NYSE:SPCE). Primarily, advanced transportation platforms for the ultra-wealthy tend not to be viable. However, one look at a chart of SPCE stock shows that I’ve been consistently wrong. But a broken clock is right twice during a 24-hour cycle and so here we are.
Of course, I’m referring to the dramatic turn of fortunes that befell SPCE stock in February of this year. At one point, shares closed up at $59.41, up 155% year-to-date. But within weeks, they crashed down to $26.53, a peak-to-trough loss of more than 55%.
What caused the quick erosion in market value was another delay in Virgin’s SpaceShipTwo test flight program. On an earnings call for the fourth quarter of 2020, management blamed a Dec. 12 aborted test flight on “electromagnetic interference (EMI) that caused a flight computer to reboot just as the vehicle ignited its hybrid rocket engine,” according to Spacenews.com.
Interestingly, Mike Moses, president of Virgin Galactic, stated, “We saw some of our sensor readings — pressures and temperatures, those kinds of things — show some unusual fluctuations, which let us know EMI was still present and maybe in systems we didn’t initially anticipate.”
Observers interpreted this disclosure pessimistically, as it implied that the company had a long way to go before becoming fully operational. Also, you don’t want any kind of issues, EMI or otherwise, when you’re breaking above the stratosphere. Therefore, it wasn’t terribly surprising that SPCE stock sold off like it did.
To the company’s credit, though, it’s moving ahead with its original testing program once the aborted Dec. 12 test flight resumes in May. Moreover, Virgin founder Richard Branson will be on board a flight, which may occur sometime this summer.
That’s really putting your money where mouth is. But will it be enough to convince Virgin Galactic shareholders?
SPCE Stock Is Facing Viability Concerns
It’s a really an awkward question. That’s because Virgin Galactic chairman Chamath Palihapitiya apparently doesn’t think so. To clarify, Palihapitiya stated that he remains “as dedicated as ever to Virgin Galactic’s team, mission and prospects.” Further, he mentioned that he sold his personal stake in SPCE stock to fund a large investment he’s making toward fighting climate change.
I think the initiative is a noble one. However, I still can’t get rid of the thought that had Palihapitiya really believed in the potential of SPCE stock, he would have held on and made a much bigger investment toward his environmental initiative.
If anything, this is a lesson that you can’t fall in love with your investments. You have no friends on Wall Street. Sometimes, who you think is your target stock’s biggest supporter could end up being the source of its downfall.
But the test flight delays bring up another concern, funding. As our own Mark Hake explained:
Virgin Galactic reported its earnings on Feb. 25 and its cash flow statement shows that the company burnt through $74 million in Q4 alone. This was part of $250 million in negative free cash flow for 2020.
The problem is the company has just $665 million in cash (before restricted cash) in the bank as of Dec. 31. If it to burns cash at a rate of $294 million from the rate it had during Q4, the cash will run out in two years. That means that sometime in the next year the company will have to raise more equity or debt. That will be dilutive to the stock or lower its inherent value.
Chances are, Virgin Galactic will not keep getting hit by setbacks in its testing program. However, if it does, it’s not an inconsequential occurrence. Indeed, each future setback will increase the cash risk.
Everything Hinges on the News
Based on how high SPCE stock went several weeks ago, its present “half-off” price tag seems like a discount. From where I stand now, I’m not opposed to taking a modest gamble. If future test flights go off as planned, I think that could quickly reinvigorate shares.
But that’s also the risk. If we have another delay or setback with the testing program, investors could quickly lose patience. Therefore, you should only engage SPCE if you can handle the volatility.
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.