If you want drama, Virgin Galactic (NYSE:SPCE) stock has it all.
The company claims to be pioneering a new industry in space tourism. It has numerous prominent investors and a solid management team. A special purpose acquisition company (SPAC) with a celebrity financier took it public.
Short sellers saw all this and declared the company to be a sham. The SPCE stock chart has resembled a spaceflight too, with numerous rocket launches and harrowing declines.
The Virgin Galactic saga entered another exciting arc over the past month. Short sellers slammed the company once again, raising questions about the company’s basic business model. But then the firm struck back, securing pivotal Federal Aviation Agency clearance for its flights. This sent SPCE stock to the stratosphere.
But will it be heading toward a crash landing? Here’s the state of the SPCE stock controversy as it stands today.
FAA Clearance: Big Deal or Big Whoop?
Last Friday, the FAA gave Virgin Galactic the go-ahead on its application for a commercial launch license. This was a pivotal development for the company, and the stock shot up 39% in a single day on the news. Great, right?
However, bears say this is an overreaction. Virgin Galactic would have essentially worthless without an operating license. So, it was already largely priced into the stock that it would eventually gain FAA approval. If traders weren’t worried about actually securing the FAA license, then this was more of a formality than a game-changer.
Time will tell which interpretation ends up being right. However, don’t be surprised if the stock dips a bit on profit-taking; that’s only natural after a 39% one-day move.
Niche Product Or Mass Market Winner?
A key disagreement lies at the heart of the SPCE stock debate. The bulls believe Virgin Galactic represents a bold step toward the final frontier. People have a longing to see something bigger than this present world, and Virgin Galactic’s space tourism offering gives humanity a glimpse of something beyond this mortal coil.
The bears, by contrast, say Virgin Galactic is an incredibly niche product that doesn’t really scratch the space itch. Bears note that the Virgin Galactic product will only take customers into the air for a few minutes and fail to reach beyond the actual limits of space as it is often defined. The customer will only spend a few minutes on average in a weightless state.
Investors that haven’t done deep diligence on Virgin Galactic might think the company’s product offering is much more robust than it actually is. The product isn’t like going to the moon or even the space station. It’s a ride maybe 50 miles up into for the air, spend a few minutes in zero gravity, and then right back to earth.
Bears argue this doesn’t come close to justifying the price tag, time, or safety risk that goes into buying a Virgin Galactic experience. Indeed, if the critics are right, Virgin Galactic’s product might be more akin to the world’s most expensive roller coaster than actual space tourism.
Competitor To SpaceX Or Different Beast?
Bears suggest that much of Virgin Galactic’s value might be coming because investors think they are investing in SpaceX rather than Virgin Galactic. The SPCE stock ticker could easily cause investors to expect some affiliation with SpaceX after all.
The thing is, these are actually very different businesses. Space-X designs and builds rockets and launch equipment. Its founder, Elon Musk, is eventually aiming to colonize Mars in large part with equipment and technical know-how from Space-X. Virgin Galactic, by contrast, is a tourism company focusing on taking people into brief flights that never go far from Earth. Both the business model and level of technical capability required to run these businesses is quite different.
This leads to an interesting point when analyzing SPCE stock. It’s fundamentally seeking to accomplish something quite different from SpaceX or Jeff Bezos’ Blue Origin. The fact that Virgin Galactic hired a Disney (NYSE:DIS) executive to be its CEO is a huge hint there.
So, will investors will treat Virgin Galactic as its own entity, or just lump it with the space colonization and exploration theme in general?
Insider Selling: Natural Or Alarming?
That last point ties into another bearish argument: notable selling. We have to start this discussion with Cathie Wood. She launched her latest sector fund, the ARK Space Exploration & Innovation ETF (BATS:ARKX). When it launched, it held a position in SPCE stock, as you’d expect for such an ETF. However, the ARKX fund sold its SPCE stock in May.
Incredibly, while Wood now owns no Virgin Galactic, she does own Netflix (NASDAQ:NFLX) and John Deere (NYSE:DE) in her space exploration fund. That’s not a great sign of confidence in Virgin Galactic, running a high-profile space fund and deciding to sell Virgin Galactic to double down on tractors and Netflix. Wood didn’t sell her position at the highs either, rather she was selling back when SPCE stock was in the $20s.
Ark Investments isn’t the only notable seller of SPCE stock either. Chamath Palihapitiya sold a notable chunk of his SPCE stock exposure at much lower prices. In addition, Virgin Galactic itself has been raising money by issuing stock on various occasions. With these sales all occurring well south of the current share price, it casts some doubt on the present valuation.
On the other hand, bulls can rightly say some of the stock sales make sense. Ark’s selling is an ugly look, no doubt. But Palihapitiya is running a zillion different SPACs, it’s not surprising that he would want to harvest gains from one of his more successful deals to reinvest elsewhere. And Virgin Galactic needs a ton of capital to get to full commercialization, so raising money is natural, even if it could have been timed better.
SPCE Stock Verdict
Buy low, sell high. It’s a simple adage, but it’s based in a real truth. You often make money fading the consensus. SPCE stock has dipped back to $20 on numerous occasions in recent months. Each purchase there would have been highly profitable with patience.
Meanwhile, Virgin Galactic stock has tended to witness sharp falls each time it gains too much altitude. When the crowd is most excited about SPCE stock, that’s generally a good time to cash in some chips. And when it dips, that’s the time to add some exposure.
I find a decent chunk of the bearish argument compelling. As such, I certainly wouldn’t be a buyer of SPCE stock up in the $50s. That said, I’ve been bullish on it at lower levels, particularly after the company hired a Disney executive to run the firm. Virgin Galactic probably won’t beat SpaceX in the big picture, but it might not need to; there’s potentially quite a niche for theme-park styled suborbital space tourism.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
