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Why You Should Love the Idea of Virgin Galactic But Hate SPCE Stock

It’s funny that the popular phrase “to the moon” — often used on social media to try to push meme stocks and cryptocurrencies higher — also applies to Virgin Galactic (NYSE:SPCE). SPCE stock has been trying to go to space not just metaphorically, but also literally.

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As it stands, SPCE stock is very volatile, with a 52-week range of $14.27 to $62.80 and a current price of around $27. The stock has fallen almost 8% in the last month, but it has also had wild price movements. Virgin Galactic is up about 17% year-to-date (YTD). Moreover, it’s up by some 59% for the past year. However, SPCE is a great example of how statistics can lie when it comes to the true financial performance of a name.

For instance, what if you bought the stock near its 52-week high in the first quarter of 2021? Then you’re facing a loss of almost 60%. And that loss is too difficult to turn into a profit if you hold onto the shares. So, considering aspects like this, what are my thoughts on SPCE stock?

I love the idea of this business but hate the shares. Here’s why you should, too.

SPCE Stock: The Potential of the Space Economy

To start, I have to say that it’s too early to judge Virgin Galactic’s overall success right now. The company is still young. However, I do have to admire founder Richard Branson as a successful businessman. And recently, he said the following:

“I really hope that there will be millions of kids all over the world who will be captivated and inspired about the possibility of them going to space one day.”

How could you not like Virgin Galactic when it has a message as strong as that?

Space is the ultimate frontier, as goes the popular Star Trek motto. So, I’m excited about space and the opportunity that lies there. Plus, I would argue that most people would love to visit space someday. The mission behind SPCE stock is responding to a very real desire, one that can certainly be profited off of.

But when it comes to investing, just how big is the space economy? At the start of the year, one report valued it at $385 billion in 2020, “with commercial space revenues totaling over $310 billion.” Additionally, Morgan Stanley estimates that “the revenue generated by the global space industry may increase to more than $1 trillion by 2040.”

So, could it be that space exploration becomes the next trillion-dollar industry? That could well be the case, but let’s also be realistic. As a sector of the space economy, space tourism will also grow. Yet, at the same time, it faces massive challenges and risks — pills that may even be too big to swallow.

With Prices Set for the Rich, Is the Business Model Worth It?

Of course, while I for one would love to visit space, I do have to wonder whether Virgin’s price of $450,000 per seat would be worth it. I mean, sure, customers can enjoy the awe-inspiring view and the lack of gravity, but can most people justify the cost?

At the end of the day, clientele will be paying almost half a million dollars per seat just for an experience and a memory for themselves. And if they want to take their family? Assuming a partner and two kids, our hypothetical family flight crew would be paying $1.8 million, without any discount offered.

Recently, I read that Virgin Galactic has about 600 reservations. So, let’s do the math. If this is true, that’s a potential $270 million in revenue. But is it realistic? For a company that reported $238,000 in sales for 2020? And secondly, just how long will it take for Virgin Galactic to actually document this revenue. After all, its space flights can only have a limited number of passengers. Finally, what about the potential for other problems in this unprecedented industry, such as regulatory or safety issues, or even an unforeseen accident?

No doubt, there has been positive news for the company lately; its first fully crewed spaceflight was a success and it received approval from the Federal Aviation Administration (FAA) for full commercial launch. But there are still real risks with SPCE stock — not to mention its lofty valuation and financial performance.

Financials and Valuation

Virgin Galactic’s Q2 2021 financial results showed that it had cash and cash equivalents of $552 million as of Jun. 30. Moreover, SPCE saw a net loss of $94 million versus a loss of $72 million in Q2 2020. Finally, in July, the company finished an “at-the market” (ATM) equity offering program that helped it raise $500 million in gross proceeds via the sale of approximately 13.7 million shares of common stock.

Looking at its previous years of financial performance, Virgin Galactic has been losing money from 2018 to 2020. In 2020, it reported a net loss of more than $273 million. It is also burning through cash; for 2020, SPCE had negative free cash flows $250 million.

Because of all this, it’s no surprise at all that, when Virgin Galactic announced its $500 million stock sale, SPCE stock crashed. Between the stock dilution and Richard Branson selling his $300 million stake in Virgin Galactic “to fund his pandemic-hit businesses,” things aren’t looking great for this name. In mid-August, Morgan Stanley downgraded SPCE stock.

Bottom Line on SPCE Stock

If I had to pick one key financial ratio to point to when it comes to SPCE stock, I would use its forward price-sales (P/S) ratio of 3,163. Looking at it on Seeking Alpha, it’s clear that this name’s valuation is in the stratosphere. In fact, it is beyond any logic.

All in all, with a history of large losses, dilution and negative free cash flows, SPCE stock is a speculative bet on the space industry. And a very expensive one at that.

If you love speculation, go for it. But if you love logic and common sense? This one may not be for you.

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On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the biedexmarkets.com.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.