Virgin Galactic (NYSE:SPCE) stock is down more than 45% this year, signaling trouble not just for the company, but perhaps for special purpose acquisition companies as well.
Naturally, plenty of folks took the optimistic view when Virgin Galactic entered the public domain via a reverse merger.
Though some analysts were warning about the dilutive nature of SPACs post-business combination, the narrative undergirding SPCE stock was simply too attractive to ignore.
Of course, hindsight being 20/20, those same early believers — if they hadn’t dropped out yet — are likely wishing they had. Even more worrying, not only could Virgin Galactic have further to fall, it could be a signal that the entire SPAC framework is even more fragile than we thought.
A Closer Look at SPCE Stock
While estimates vary from one research firm to the next, information compiled by the U.S. Chamber of Commerce suggests that at the upper end of the range, the space economy could hit $1 trillion by 2040.
From here, it is starting to look as if Virgin Galactic is a platform to get the juices flowing with the space economy, more than a serious space play.
According to a shareholder lawsuit that’s targeting Virgin Galactic founder Sir Richard Branson and former board chair and SPAC sponsor Chamath Palihapitiya.
Filed on March 1, the suit “alleges several insiders, including Branson and Palihapitiya, sold stock in the space-tourism start-up even though they were aware that some of the company’s ships faced durability issues that hadn’t been disclosed publicly,” per a Barron’s report.
The article goes on to state that the “durability issues, disclosed in October 2021, pushed back Virgin Galactic’s start of commercial service and have impacted the company’s share price.”
Personally, I felt that a lawsuit was inevitable. Yes, retail investors have to take responsibility for their own decisions. However, SPCE stock was heavily hyped, and for what? Shares are down 71% over the trailing year and, as I mentioned, already down 45% this year.
Virgin Galactic Could Take Down Other SPACs
According to a particularly damning Wall Street Journal article, the SPAC ship is sinking. As it states, the “hype is giving way to reality. Like so many investment fads, what at first seemed like a way to earn easy money has revealed itself to be full of potential perils.”
One of those perils is the threat of tighter regulation, which would seem to take the air out of the incentive for sponsors and other corporate insiders to go the SPAC route.
As you know, the process of a private enterprise merging with a publicly traded shell company features a less onerous regulatory oversight than what a traditional initial public offering will warrant.
If SPAC sponsors are being unscrupulous — and at least a few are — these blank-check firms represent an easy way to milk money from retail investors. Put some regulations in, and suddenly the crowd dissipates.
It’s also incredibly problematic that per a Reuters report, SPAC redemption rates averaged around 60% toward the latter months of 2021. In short, this means that investors would rather absorb the opportunity cost of holding onto a blank-check firm for however many months than move through with the proposed merger.
It’s a bad look and SPCE stock is making the situation putrid.
Not All SPACs are the Same
To be clear, not all SPACs are the same. Some have done well following their business combinations. Or at least had been until the markets decided to go haywire.
However, the harsh reality is that SPCE stock was one of the hero SPACs if you will. But following its implosion — and assuming it only gets worse from here — Virgin Galactic has become the investment equivalent of “Shoeless” Joe Jackson.
It ain’t pretty and you may want to consider cutting your losses.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.