There’s little reason to immediately invest in Virgin Galactic (NYSE:SPCE) stock following the delays of the company’s test flights.
The postponements clearly lowered the company’s share price, which dropped 17% immediately following the news which was released on Oct. 14.
No matter how you slice it, the market isn’t likely to reward SPCE stock soon. With that in mind, let’s start with a pessimistic take on the mid-October announcement and then explore a best-case scenario for the company.
The Bad News
The bad news was that Virgin Galactic would have to take steps to enhance its VMS Eve and VMS Unity ships. As a result, Virgin Galactic will not be able to conduct any test flights for roughly nine months.
That’s a big blow to the company’s revenue generation plans. According to Barron’s, it had planned to begin carrying out revenue-generating commercial flights in early 2022.
But now it will have to postpone those flights for nearly a year. “The enhancement period is now beginning approximately one month later than anticipated, and commercial service is now expected to commence in Q4 2022,” the company reported in a press release.
The news led UBS (NYSE:UBS) analyst Myles Walton to downgrade SPCE stock to a “sell” rating. He also slashed his target price on the name to $15 from $26.
The Good News
Despite the delays, there is positive news. Specifically, Virgin Galactic’s flights were cleared to resume after an inquiry was launched by the FAA related to air traffic control clearance and real-time mission notification. On Sept. 29, the company was again authorized to resume flights by the FAA.
Another problem was created for Virgin Galactic when a potential manufacturing defect was flagged by a supplier to the company. The supplier identified a potential issue with the flight-control actuation systems that it supplies to Virgin Galactic. But that issue was apparently resolved as the FAA has again cleared the company to resume its flights to space.
SPCE Stock Can Climb Further
UBS wasn’t the only big investment firm to become less bullish on Virgin Galactic due to the recent news. Bank of America (NYSE:BAC) moved its target price on the company’s shares from $41 to $25 in the wake of the report.
The obvious reason for optimism, though, is that Bank of America’s $25 price target exceeds the $20.26 level at which the shares closed yesterday . Further, analysts’ average price target is now close to $29.
InvestorPlace columnist Joseph Nograles remains optimistic about the firm’s future prospects. He think that long-term safety trumps short-term profit concerns, and that view certainly has merit. He rightly points out that space travel is bound to suffer setbacks:
“As I said before, space travel is such a brand new frontier, it is inevitable that the technology needs to be refined and enhanced. These temporary setbacks do not diminish the massive potential of SPCE stock for long-term focused investors,” he wrote.
The Bottom Line
In my opinion, SPCE stock does not have strong, short-term catalysts. The market will continue to digest the flight delay, and that issue will weigh on the shares for the next few months.
It will also serve as a catalyst for questions regarding the overall safety of space flight in general and of Virgin Galactic’s ships in particular.
Undeniably, the postponement will be a significant blow in the short-term. But I think it simply gives investors another chance to establish a position in a potentially groundbreaking company.
On the date of publication, Alex Sirois 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.
