Virgin Galactic (NYSE:SPCE) has had a rough go of it recently. SPCE stock got off to a hot start, shooting up from $10 to $40. The stock crashed along with everything else in March. But by July, Virgin Galactic was back up to $25 and looked like it had something good going.
Now, though, the stock has gone cold. Shares are back down to just $20. Some of that can be blamed on the broader market’s recent struggles. However, much of the fault goes to the company itself when the share price decline is this steep. It seems traders are worried about the company’s credibility, and in particular its lack of revenues.
Is that a fair concern, though?
No Revenues, But Near-Term Positives Are Coming
A common complaint with Virgin Galactic is that the company doesn’t have significant commercial operations yet. However, unlike many electric vehicles companies that are little more than vehicle sketches at this point, Virgin Galactic is fairly close to proving its merit.
Robert Spingam of Credit Suisse explained the upcoming catalysts:
“We now know to expect two more test flights, both powered, one with two pilots and the second with a full crew. Since these two flights (expected during Q4 and early Q1) are intended to complete the full sub-orbital mission, their achievement should be significant positive catalysts for re-rating.”
Additionally, in a blue-sky scenario where everything goes right, Credit Suisse sees potential upside to $43 per share. That’s nearly a triple from here. Yet SPCE stock keeps sliding lower instead of rallying. So, what’s going on?
Echoes of Nikola
Short sellers and skeptics have compared Virgin Galactic to Nikola (NASDAQ:NKLA). As you may know, Nikola’s stock has collapsed in recent weeks. Nikola had peaked at $90 in June but is now down to just $19 per share.
One key similarity is that both companies sold stock to the public via special purpose acquisition companies. Historically, SPACs have a very poor reputation. SPACs tend to underperform the market dramatically and also feature many low-quality companies. A reason for this is that investment banks underwrite traditional initial public offering. If banks promote too many bad deals, it damages their credibility and makes it hard to get hot IPOs in the future. So, banks have certain standards for deals.
Nikola, by contrast, did not have any bank underwriting it. Its implosion is squarely on the shoulders of investors that bought into that particular SPAC. With SPACs, it’s always “buyer beware.” Now that Nikola has flamed out, investors are worried about Virgin Galactic and other unproven SPACs.
There are similarities. For one thing, both companies have essentially no revenues. Nikola was earning just thousands of dollars of revenues per quarter, whereas Virgin Galactic is around $4 million per year. Obviously, neither of those is a large sum. That’s because neither company’s technology is fully proven yet. Nikola infamously rolled its truck prototype down a hill to make it look like it was cruising. Virgin Galactic has demonstrated limited test flights but has more to go in terms of proving its safety and obtaining necessary licenses.
Virgin Galactic Has More Credibility
So why isn’t Virgin Galactic the next Nikola in the making? There are a few things that make Virgin Galactic more credible. For one thing, there have been some test flights. Not enough, according to the bears. But we know at a minimum that Virgin Galactic has a viable vehicle design. That’s more than can be said for Nikola at this point.
Additionally, Virgin Galactic’s new chief executive officer, Michael Colglazier, is a key piece of the puzzle. I highlighted how Colglazier had an exemplary career at Disney (NYSE:DIS). It was a leap of faith for him to leave a cushy post at Disney and move to an unproven concept company. In doing so, it gives Virgin Galactic a ton of credibility. That’s in addition to Richard Branson being invested in the company and willing to fly on one of its test flights in the near future.
Nikola, by contrast, never attracted a prestigious management team. It was a “trust-me” situation with Trevor Milton and once that confidence broke, the stock collapsed. In the post-Nikola world, management quality will become more important for potential investors. Virgin Galactic ranks far more highly on this than most of its other SPAC peers.
SPCE Stock Verdict
I’m not a huge fan of SPCE stock in general. This is a story stock that will take years to become a commercial success if the business plan works. But the bearish angle seems a little overblown here. Virgin Galactic has some red flags, but the comparison to Nikola is too harsh.
Some factors, in particular bringing in a quality CEO, elevate Virgin Galactic above many of its SPAC peers. As such, it’s unclear why Virgin Galactic should be trading this poorly, at least while other SPAC stocks are still soaring.
A number of bears still view Virgin Galactic as little more than a Richard Branson vanity project. And I get where that criticism is coming from. From the right price, however, SPCE stock is worth a roll of the dice if you like the story. With Virgin Galactic back at $20, this is a much better price than it was recently trading at. And with catalysts including more test flights coming up over the next two quarters, this is a decent time to be looking at Virgin Galactic while the market isn’t paying much attention.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.
