Virgin Galactic Holdings, Inc. (SPCE - Get Rating) develops, manufactures, and operates spaceships and related technologies for conducting commercial human spaceflight and commercial research and development payloads into space. The company offers its products and services to private individuals, researchers, and government agencies.

Last week, SPCE announced its deal with Boeing Co. (BA) subsidiary Aurora Flight Sciences to build two additional carrier aircraft to support its coming spacecraft fleet. The new motherships are expected to support up to 200 launches a year, and the company intends to scale its operations and embark on more missions through this partnership.

It has gained 9.8% over the past month and 7.4% over the past five days. However, the stock has declined 83% over the past year and 48.2% year-to-date to close its last trading session at $6.93.

Here are the factors that could affect SPCE’s performance in the near term:

Stretched Valuations

In terms of its forward EV/Sales, SPCE is trading at 543.37x, 34,982.8% higher than the industry average of 1.55x. The stock’s forward Price/Sales multiple of 945.63 is 80,358.9% higher than the industry average of 1.18. In terms of its forward Price/Book, it is trading at 3.46x, 48.2% higher than the industry average of 2.33x.

Negative Profitability Margins

SPCE’s trailing-12-months ROE of a negative 53.97% is significantly lower than its industry average of 14.31%. Its trailing-12-months ROTC and trailing-12-months ROA of a negative 24.89% and 23.39% are considerably lower than their respective industry averages of 6.89% and 5.14%.

Bleak Analyst Expectations

The consensus EPS estimates of a negative $0.37 and a negative $1.47 for the quarter ending September 2022 and the fiscal year 2022 indicate 15.6% and 2.8% year-over-year decreases. Likewise, the consensus revenue estimates for the same periods of $130 thousand and $1.57 million reflect declines of 95% and 52.3% from their respective prior-year periods.

POWR Ratings Reflect Bleak Prospects

SPCE’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a Sentiment grade of F. Bleak analyst expectations around the stock justify this grade.

SPCE also has a D grade for Value and Quality, consistent with its lofty valuations and negative profitability margins.

In the 31-stock Airlines industry, it is ranked last. The industry is rated F.

Click here to see the additional POWR Ratings for SPCE (Growth, Momentum, and Stability).

View all the top stocks in the Airlines industry here.

Bottom Line

Although the deal with BA is expected to benefit the company’s operative capacity, the first carrier aircraft is expected to enter service, not before 2025. Moreover, its negative ROE is concerning. With analysts expecting further downsides in its top and bottom line, I think the stock might be best avoided now.

How Does Virgin Galactic Holdings, Inc. (SPCE) Stack Up Against its Peers?

While SPCE has an overall POWR Rating of F, one might consider looking at its industry peers, Air France-KLM SA (AFLYY - Get Rating) and Deutsche Lufthansa AG (DLAKY - Get Rating), which have an overall B (Buy) rating.

SPCE shares were trading at $6.97 per share on Wednesday afternoon, up $0.04 (+0.58%). Year-to-date, SPCE has declined -47.91%, versus a -19.30% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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