Should You Buy the Dip in Virgin Galactic Holdings?

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Virgin Galactic (SPCE) stock has grossly underperformed the broader markets in 2021 and is down 67% from record highs. This is a result of its weak financials and high research and development expenses, making it a high-risk bet despite the recent pullback.

In 2021, several growth stocks have lost significant momentum after stellar runs. As growth stocks generally trade at steep valuations compared to their revenue and earnings, it’s enticing when they are available at a lower multiple. 

One such stock is Virgin Galactic Holdings (SPCE), which more than doubled in 2020 and is now down 15% year-to-date.  In fact, Virgin Galactic stock is now down 67% from all-time highs. SPCE is an aerospace company that develops human spaceflight for individuals as well as researchers in the U.S. It also manufactures air and space vehicles.

Given the recent pullback in stock prices, let’s see if SPCE is a buy right now.

What impacted Virgin Galactic stock recently?

On September 10, Virgin Galactic announced its plans to delay the Unity 23 flight mission by a few days due to a conceivable manufacturing fault in a module related to flight control. The Unity 23 was a mission that would focus on microgravity research. Virgin Galactic confirmed the defect was not in-house but part of third-party equipment.

SPCE was also impacted after Blue Origin successfully launched its second space flight that had noted Star Trek actor William Shatner onboard. In addition to Shatner, the all-civilian flight also had paying customers making it the company’s first commercial launch. Further, last week Virgin Galactic confirmed its first commercial launch (the Unity 23 mission) will now begin in Q4 of 2022.

This longer-than-expected delay might raise a red flag for investors who think that Virgin Galactic is losing the space race to its peers.

The bull case for Virgin Galactic stock

Shortly after Richard Branson’s flight the company priced bookings for its commercial flights at $250,000 per ticket. Virgin Galactic has now confirmed the minimum price per ticket has increased to $450,000 which suggests there would be higher priced bookings as well.

In an investor presentation prior to Virgin Galactic’s SPAC (special purpose acquisition company) merger, the company forecast to fly 1,565 passengers to space annually. In case these estimates are met, it will generate over $700 million in sales. As per earlier estimates (on ticket prices of $250,000), Virgin Galactic had forecast sales of $590 million and EBITDA of $274 million.

But as the ticket prices have almost doubled, it might lead to a tepid demand environment. Alternatively, investors should be optimistic given the company has managed to develop a pricing strategy at an early stage.

The final verdict

Bank of America has forecast the space industry to touch $1.4 trillion in the next decade, more than tripling in this period.  And Wall Street analysts expect SPCE stock to increase by 50% in market value in the next 12-months. 

However, despite a rapidly expanding addressable market, Virgin Galactic is a stock I will avoid right now.  At best, Virgin Galactic will be on track to report sales of $700 million by 2024 (as the launch has been delayed by a year), valuing SPCE stock at a forward price to 2024 sales multiple of 7.4x.  At worst, the company that’s part of a highly disruptive industry, might continue to disappoint investors which can also lead to another catastrophic delay in the launch of its commercial flights.

There is a lot of uncertainty surrounding Virgin Galactic stock, which ended the June quarter with a cash balance of $551.6 million. In the last two years, it spent $281 million in research and development expenses while its operating loss since Q2 of 2020 stands at a hefty $306 million.

It suggests Virgin Galactic will have to raise additional capital in the form of debt or equity which will either pressurize the balance sheet of a loss-making company or result in shareholder dilution.

SPCE shares . Year-to-date, SPCE has declined -15.09%, versus a 22.19% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.

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