3 Reasons to Avoid SPCE Stock Despite the Successful Test Flight

Virgin Galactic (NYSE:SPCE) stock has had a wild year thus far. But, of course wild swings are to be expected, especially considering SPCE stock operates in the space exploration industry.

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This industry has never been hotter, thanks to billionaires who’ve zeroed in on it as another high-growth sector. Richard Branson, Elon Musk and Jeff Bezos are all competing to privatize human space exploration.

In particular, Musk’s SpaceX and Bezos’s Blue Origin have been at each others’ throats. This is because the billionaires established their companies around the same time period.

That said, SpaceX has had a leg up on the competition. It first flew a rocket to orbit in 2008. Both NASA and the Pentagon have also awarded the company lucrative contracts.

Meanwhile, although Blue Origin has moved slower, it has flown its New Shepard vehicle to space 15 times and is getting ready to fly its first mission with humans. Additionally, Bezos has said he will leave his role as CEO of Amazon (NASDAQ:AMZN) later this year. Many believe this decision will allow him to focus on Blue Origin.

But hey — isn’t this article about Virgin Galactic?

Well, yes, but there is little positive news to report on Virgin’s end. In December, the company attempted a SpaceShipTwo Unity space plane test flight, but that was cut short after technical difficulties.

Recently, though, SPCE stock jumped. This was after the company announced its next test was targeting the coming weekend, following the completion of a maintenance review. That flight was successful, leading to the stock rising last week.

However, does that mean the issues plaguing this company are over? Not by a long shot.

SPCE Stock and the Reality of Investing in Space Exploration

This past year, we have seen a plethora of novel investing strategies come into their own. Electric vehicle (EV) challengers, the SPAC market and a recent Reddit-induced frenzy have all combined to power the markets into an incredible bull run. Space exploration has also done well. Today, there still aren’t enough companies in this arena, but it’s a high-growth area where a lot of money can be made.

In fact, Morgan Stanley predicts that the global space industry could generate over $1 trillion by 2040, up from $350 billion today. So, there are no surprises why both the public and private sectors are scrambling to get a piece of the action. But, for all the progress private space companies have made, the reality is that SPCE is really the only option investors have to pour capital into.

True, Boeing (NYSE:BA) and Northrop Grumman (NYSE:NOC) have certain segments tied to space and space exploration. However, these are not the main sources of revenue for their businesses. That said, since they have multiple business lines that they can rely on, they also do not suffer from the drawbacks of being a pure play. Virgin Galactic does.

Relationship With the Broader Virgin Group

It’s easy to forget how many hats Sir Richard Branson wears. The billionaire has been an entrepreneur for most of his life, pursuing his first ventures as a teenager. His big-branded firms — such as Virgin Atlantic, Virgin Money and Virgin Media — all have other major stockholders. But make no mistake; Branson is the driving force behind these brands.

Investors trust the Branson brand and it’s a big reason they flocked to Virgin Galactic when it came public in 2019. However, what many investors may not have realized is the extent of its relationship with the different entities of Virgin Group.

Now that Branson has sold SPCE stock multiple times to finance his other ventures, shareholders are beginning to understand this. Overall, Branson has sold $650 million of SPCE stock in the past year to fund other struggling businesses in the group. The airline business, in particular, has had a really rough time; much like the broader space, it has struggled with mounting debt and non-existent demand due to the pandemic.

Of course, one does have to give credit where it’s due. In the U.S., the airline industry got a big boost from the government due to large multibillion-dollar bailout packages. Virgin Atlantic did not.

If the Virgin brands continue to struggle overall, however, expect Branson to continue selling SPCE stock to finance a revival.

The Financials Need a Face Lift

Ultimately, everything boils down to numbers.

No matter how much speculation is built into the markets, if a company does not post the financials it needs to be successful, there is little chance of it succeeding long-term.

In the last five quarters, Virgin Galactic has reported four negative surprises. For example, in the most recent quarterly results, it reported a net loss of $130 million, compared to a $377 million net loss in the first quarter of 2020.

That is a good result. But if we dig a little deeper, there are two worrying statistics. These are the selling, general and administrative expenses (SG&A) of $45 million (compared to $27 million in the year-ago period) and the research and development (R&D) expenses of $36 million (compared to $34 million in the Q1 of 2020).

In its fourth quarter, the company reported R&D expenses of $41 million (compared to $46 million in the Q3 of 2020) and SG&A expenses of $33 million (compared to $31 million in the Q3 of 2020).

You can probably sense the trend that is developing here. R&D expenses — which are the lifeblood of a space exploration company — are mostly in-line or declining. On the other hand, administrative costs are on the rise. Those are the expenses that should be declining.

Of course, with SPCE stock still being relatively new, we do not have several quarterly reports to make a more firm assessment here. However, the figures that we do have are not heartening at all.

Better to Stay Away From SPCE Stock

Whether or not space exploration becomes the next frontier of the investment world remains to be seen. But even if you want to invest in the space, you have to pick a company that’s doing well and is a top priority for management.

As I touched upon earlier, Bezos recently announced he is stepping down as CEO of Amazon this summer. So, naturally, he’ll likely have more time to focus on Blue Origin’s goals.

That is not a luxury that Branson can afford when it comes to his larger group, however. Between Virgin Galactic’s concerning financials and the nature of the beast with Virgin Group, I believe its best to stay away from SPCE stock today.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.


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