Virgin Galactic (NYSE:SPCE) is likely to soar once its next flight, on Sunday, is successful. But as Barron’s magazine points out, this could be a case of “Buy on the rumor, sell on the news.” SPCE stock could actually drop on Monday, once the flight is over.
The company announced on July 1 that the flight would include Virgin Galactic’s founder, Sir Richard Branson. He is to be one of four passengers (“mission specialists”) that will be on the flight into space, along with the two pilots.
What This Means for Virgin Galactic
The implication here is clear. If a “civilian” like Branson can make it in space, then the way is clear for those like him to start taking the trip. The good news for SPCE stock is that this will allow the company to start booking significant revenue.
But consider this. SPCE stock rose 17.3% Thursday. The Barron’s article advised its readers that investors should consider trimming their positions in the stock prior to the flight. And, of course, it goes without saying that this also implies that new investors should probably wait before buying it.
The stock hit a recent low of $15.50 on May 13 and closed at $52.69 on July 8. That is a gain of 240% in the space of less than one month. Obviously, a good deal of the good news is already priced into SPCE stock.
Where This Leaves SPCE Stock
Reports from Virgin Galactic were that the base price will be $250,000 per person who signed up early and could “climb substantially” from there. As a result, if commercial operations are to begin soon, the company could start booking substantial revenue.
For example, Seeking Alpha projects that revenue for 2021 will be minimal at $2.9 million. But 2022 should have $56.38 million in total revenue. Moreover, by 2023, sales estimates are for $190.36 million.
Right now, at $52.69 per share, Virgin Galactic has a market capitalization of $12.68 billion. This means that SPCE stock now trades at a whopping price-to-sales (P/S) multiple of over 4372 times for 2021 and 225 times on 2022 forecast sales.
It is not until 2023 sales of $190 million that the stock has any sort of a reasonable P/S multiple: 66.6 times. But that is so far out in the future, that it is essentially speculative in nature. It only becomes real if the company actually starts producing revenue. And that is why the flight on Sunday is so important.
What to Do with SPCE Stock
Most analysts have much lower price targets right now than the price as of July 8. For example, TipRanks reports that 11 analysts that have written on SPCE stock in the last three months have an average 12-month target price of $34.64. This represents a potential 34% drop in the stock.
The same is true at Seeking Alpha. Their survey of 10 analysts is with a price target of $34.30. And Yahoo! Finance reports that 10 analysts have an average price target of $35.40. All of these are well below today’s price. So, that is another indication that SPCE stock could well be overextended right now.
Most investors will want to see how well the company’s prospects progress. If the company can actually achieve sales progress, and if the July 11 flight is a success, there might be another opportunity. And if Barron’s is correct, maybe that opportunity will come if the stock drops after the July 11 flight.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
