<p>Among stocks with a market capitalization of more than $ 1 billion, Virgin Galactic (NYSE: SPCE) has been the best stock in 2020. It has not been close. The SPCE share has risen 175% in less than two months. Second place Enphase Energy (NASDAQ: ENPH) has received “only” 123%.
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The parabolic gains in SPCE seem to be too much. Along with major moves in Tesla (NASDAQ: TSLA) – No. 3 on the hitherto returned list – Shopify (NYSE: SHOP) and other growth names, it has taken back memories from the dot-com bubble.
As a result, I expect a return. Shares already regained 9% on Friday. But I would not let bubbling short-term trading obscure the long-term fall of Virgin Galactic shares.
Space tourism is the future. Virgin Galactic is the only pure game on that trend in the market – and it has a valuable first-hand advantage. It should make SPCE shares a purchase at some point.
There are short-term concerns regarding valuation. Virgin Galactic has a market capitalization of $ 6.2 billion. Its revenue for the first nine months of 2019, according to an application this month to the US Securities and Exchange Commission, was only $ 3.25 million.
Even if we assume growth during the fourth quarter, the SPCE share is likely to have a price-to-income multiple over 1000 times.
Of course, the stock should look expensive after 12 months of revenue, given that spaceflight has not yet begun. But as of September 30, the company had only taken in $ 82 million in deposits, according to the same filing.
At the same time, Virgin Galactic has billions of dollars in spending on the road before profitability comes years, if not decades, in the future.
Has the SPCE share gone too far?
In addition to the basics, there is reason to question the valuation. Virgin Galactic did not go public via the traditional starting point. Rather, it merged with a specialty acquisition company or SPAC.
It’s not necessarily a red flag. Another SPAC, the Diamond Eagle Acquisition (NASDAQ: DEAC), has been one of 2020’s best stocks. Diamond Eagle merges with the daily provider of fantasy and sports games DraftKings, another pure game with a huge opportunity.
But unlike DEAC, investors initially yawned at Virgin Galactic’s backdoor introduction. In fact, SPCE shares actually declined when the merger between Virgin Galactic and the strangely named Social Capital Hedosophia SPAC was completed at the end of October.
The stock reached close to $ 7 in November, not long after we first covered SPCE on my “Moneyline” podcast. They have since received 391% – basically no news.
There is another aspect to consider. Part of the optimism towards Virgin Galactic is the opportunity for investors to invest with billionaire Sir Richard Branson, founder of Virgin Empire. Branson’s businessmen are almost without parallel. But in the SPAC transaction, Branson relinquished control of 40% of the company for less than $ 700 million.
These shares are now worth close to $ 3 billion. It seems very unlikely that Branson was willing to sell shares so cheaply to raise capital. It seems rather likely that Branson himself did not believe that the business as a whole was worth the $ 6 billion that the market was currently suggesting.
The case of Virgin Galactic Stock
So there is a case for a withdrawal, possibly in the short term. Shares are in the red today. SPCE already fell, as mentioned, by 9% on Friday.
However, this decline may provide a long-term buying opportunity. After all, Virgin Galactic has a huge path to growth in the future.
Its connection to Branson provides access to high-dollar potential customers – and a proven management team. The only competitor at the moment is Blue Origin, founded by Amazon (NASDAQ: AMZN) founder Jeff Bezos back in 2000. SpaceX is currently focusing elsewhere, while Boeing (NYSE: BA) is facing distraction from its ongoing 737 Max releases.
Space tourism is the future. It is a market that could easily handle two participants. Meanwhile, as one Morgan Stanley analyst noted last year, space tourism research could lead to the development of new hypersonic travel on Earth.
The best way to make money in this market has been to own a leader in a fast growing industry. Virgin Galactic looks like that leader and space tourism is a hugely attractive industry.
Patience can pay off
At the very least, however, there is simply no need to rush into the SPCE share. The stock has been exceptionally volatile – and will likely remain so. The valuation looks extensive.
Nimble traders can find a way to monetize that volatility. However, long-term investors can take their time. A pure play on space tourism should pay off at some point. However, that point may not be right now.
Matthew McCall left Wall Street to actually help investors – by getting them into the world’s biggest, most revolutionary trends FOR anyone else. The power to be “first” gave Matt’s readers the chance to bank + 2,438% in Stamps.com (STMP), + 1,523% in Ulta Beauty (ULTA) and + 1,044% in Tesla (TSLA), just to name a few . Click here to see what Matt has up his sleeve now. Matt does not directly own the above-mentioned securities.