Virgin Galactic (NYSE:SPCE) stock went “to the moon” twice earlier this year.
It was an already popular play before the meme stock craze, but you can chalk up this investing phenomenon as the main reason for 2021 price spikes.
The high concept nature of its business (space exploration) coupled with high short interest (making it a squeeze target), you can see why Reddit traders were once all over SPCE stock.
Unfortunately, its meme days are seemingly behind it. Much like other secondary meme plays, like Blackberry (NYSE:BB) or ContextLogic (NASDAQ:WISH), buzz about it on r/WallStreetBets and other online platforms has cooled considerably. However, this may not be the case permanently.
Once the company makes a big leap out of the pre-revenue stage, excitement and higher prices for Virgin Galactic could return. This probably won’t in the immediate term and probably not in the next few months, either.
That said, this isn’t to say that where it trades today (around $15.20 per share) is near the floor. Several factors could send it lower before it has a chance to rocket back to past highs. If you’re bullish that this industry will eventually take off, though, it may be worth a look as it falls out of favor.
A Closer Look at SPCE Stock
Along with its waning appeal as a meme trade, other factors have played a role in Virgin Galactic’s descent since the summer. For example, consider the company’s $450 million secondary offering, completed in August. The resulting shareholder dilution put pressure on shares.
Also, its announced move in October to suspend test flights for as long as ten months, in order to enhance/modify its fleet. This means that the space exploration company will not commence commercial flights until at least the fourth quarter of 2022.
This resulted in a sharp plunge for SPCE stock, and the downgrade from UBS’s Myles Walton didn’t help. Cutting his rating from “hold,” to “sell,” and his price target from $26 per share to $15 per share, the analyst cited this delay as the key reason behind his rating change.
Yet, based on numbers discussed in more recent announcements, putting up with the delays may end up being worth it. As my InvestorPlace colleague Will Ashworth recently discussed, the company already has 700 reservations for its first commercial flight, where tickets go for $450,000 each.
Although it’s taking some time, the demand’s definitely there for this pricey but literally “out of this world” experience. If in the coming years more of the world’s affluent decide to partake, Virgin could generate hundreds of millions, if not billions, in revenue.
It will also pave the way for the company to eventually offer less expensive space exploration packages. In turn, creating a business large enough to sustain and grow the company’s valuation.
Even After Its Big Plunge, There’s Downside Risk
Although SPCE stock has a shot (or should I say moonshot?) of making its way back to higher prices, it may take some time. Not only that, between now and when its business finally begins to take off, shares in the former meme favorite could experience more downward pressure.
The Federal Reserve that it’s going to tighten its policies in order to combat inflation by raising interest rates. Higher interest rates lower the present value of growth stocks, as their expected earnings are years down the road. Virgin Galactic, even after its more than 74% drop from its 52-week high, could move lower.
That’s not all. There’s still the risk it’ll have to raise more outside capital through dilutive secondary offerings. Per its most recent 10-Q (quarterly) financial filing, Virgin has around $702.6 million in cash and $256.7 million in long-term marketable securities.
With an expected negative free cash flow of between $85 and $95 million this quarter, you may think it has enough cash to operate until it starts generating revenue.
However, that assumes it sticks to its current late 2022 commercialization timeline. Further delays could necessitate another capital raise.
The Bottom Line on Virgin Galactic
Not simply just a play on words, “moonshot” remains the best phrase to use when describing Virgin Galactic. If the bull case for space exploration plays out, and by the next decade becomes a multi-billion dollar market, an eventual move back to past highs may be in store for this stock.
If you’re confident in this outcome, as well as confident that it’ll stick to its current timeline the stock is a buy now and in the near term. While falling out of favor today, progress with its space exploration endeavors could send SPCE stock rocketing higher once again.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.