SPCE: Should You Buy the Dip in Virgin Galactic Holdings?

Virgin Galactic Holdings, Inc. (SPCE) became the first publicly traded space tourism company after a reverse merger with Social Capital Hoedsophia in October 2019. Because commercial space tourism is gaining popularity among the rich, and because there have been technical innovations in space travel, SPCE could benefit significantly.

Some 600 seats on Virgin Galactic spacecrafts have been pre booked, with each ticket priced between $200,000 and $250,000. As a result, the stock has gained 104.6% over the past year, and 132.2% over the past nine months.

SPCE CEO Michael Colglazier announced last November that each of its spaceports is projected to generate $1 billion in revenues. This has driven the stock to a 102.8% gain over the past three months. But, even though the company leads the space tourism industry, it may still take some time for commercial travel to space to become a commonplace reality.

Here’s what we think could shape SPCE’s performance in the near term:

Failed Tests

SPCE aborted its scheduled powered flight on December 12 last year due to a sudden halt in the spacecraft’s motor engine sequence. The aircraft managed to ascend 40,000 feet above Earth before an engine failure forced the spacecraft to descend.

SPCE is now reviewing the technical glitch and has not yet announced plans to resume test flights. Moreover, Chamath Palihipitya, who held a 10% stake in SPCE as a SPAC sponsor, sold his entire stake in the company over the past month because the company failed to become operational. The stock has subsequently declined 43.5% over the past month.

Weak Financials

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SPCE does not have a viable revenue source. Despite having a market capitalization of nearly $8 billion, its trailing 12-month revenues were $238,000, primarily from pre-booking income. SPCE is bleeding cash to remain operational. Its net income and EPS margins are negative. Moreover, its CAPEX/sales margin of 7227.31% is significantly higher than the industry average 2.63%. Its trailing 12-month net operating cash flow and levered free cash flow are negative $233.16 million and $151.16 million, respectively.

Sky-High Valuation

In terms of forward price/sales, SPCE is currently trading at 1347.17x, which is significantly higher than the industry average1.58x. Its forward ev/sales and price/book ratios of 1239.08x and 16.37x are significantly higher than respective industry averages.

Price Target Reflects Potential Downside

SPCE is currently trading 46.5% below its 52-week high of $62.80, which it hit on February 4. Analysts expect SPCE to further decline 24% in the near term to hit $25.67.

Unfavorable POWR Ratings

SPCE has an overall rating of F, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

SPCE has an F grade for Value, Sentiment and Quality. This is justified, given the company’s premium valuation absent an adequate revenue generating model. In addition, analysts expect the company’s EPS to remain negative until 2022.

Of the 27 stocks in the F-rated Airlines industry, SPCE is ranked at the bottom. In addition to the grades I’ve highlighted, you can check out additional POWR Ratings for Stability, Growth and Momentum here.

There is only one stock in the Airlines industry with an overall rating of B. Click here to see it.

Bottom Line

SPCE has been making headlines as the first publicly traded space tourism company. However, the company requires a few years to catch up to its current valuation because it is still in the developmental stage. Moreover, with several other companies, such as SpaceX and Blue Origin, entering this space, SPEC must cross several hurdles before it generates a steady stream of revenues. Hence, we think the stock is best avoided for now.

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SPCE shares were trading at $34.55 per share on Friday afternoon, up $0.97 (+2.89%). Year-to-date, SPCE has gained 45.60%, versus a 5.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...