It took just six weeks since I last wrote about it for shares of Virgin Galactic (SPCE -4.61%) to triple in value. What started as a rosy stock market analyst note on the future potential of the space travel venture has turned into a mad dash to buy up shares -- from large institutional investors to small mom-and-pop traders trying to catch the ship before it launches. The swings in value have been wild, with intraday action sending shares up and down by double-digit percentages.
I did speculate that the company could be a long-term success, but the stock price tripling in a year -- let alone in a little over a month -- wasn't in my mind as a possibility. At the time, I (regrettably) passed on a purchase -- although this booming stock is most certainly overcooked at this point. It's time to cut to the chase and talk investing, not speculation.
Space tours now, space travel later
Virgin Galactic is another company started by billionaire businessman Sir Richard Branson (of Virgin Airways and Virgin Mobile fame, among other companies). The company has sold all of the seats for its first space tourism voyages, expected to commence later in 2020. At $250,000 a seat, the tours are for a select few, but the early interest is encouraging. The company's aircraft, VSS Unity, was also recently relocated from the manufacturing facility in Mojave, California, to Virgin Galactic's headquarters at Spaceport America in southern New Mexico, where it will undergo additional flight testing and preparations.
Adding to investor (and speculator) hopes that space tours will soon be viable was the news that Elon Musk's SpaceX was the first company to receive approval from NASA to make a commercial passenger flight to space -- likely in 2021 or 2022. Expectations are running high that Virgin will be close behind in receiving approval as well.
Beyond all the current fuss, what had analysts over at Morgan Stanley originally excited about the stock was that it sees the commercial space-based travel industry being worth about $800 billion in a couple of decades' time. That's not flights for the rich and famous, but rather space flights as a disruptor of the current airline travel industry -- which is projected to generate nearly $900 billion in commercial flight revenue worldwide this year.
Granted, Virgin Galactic has competition. There's the already mentioned SpaceX, as well as Jeff Bezos' project Blue Origin, which has similar aspirations. But Virgin Galactic is the only one that's a publicly traded stock. That explains all the hype and scramble to scoop up shares, thus sending the stock higher on its voyage to kick off 2020.
What we have here is a bubble
Being the only game in town (at least when it comes to publicly traded space travel companies) doesn't make Virgin Galactic a perfect stock to own for the space industry, though. On the contrary, investors should know that this is a start-up phase business. Through the first nine months of 2019 (the final quarter of the year will be reported on Feb. 25), Virgin Galactic lost $138 million on just $3.25 million in revenue. With just $85.5 million in cash and equivalents at the end of the third quarter, Virgin is going to need to find additional funding pretty quick.
Granted, that shouldn't be too big a problem given the interest shares have been receiving as of late. With even large investors divulging stakes in the space start-up and prices soaring, Virgin will likely sell new stock at some point to raise cash. That extra supply will likely put some downward pressure on prices. Put simply, what goes up must come down, even a rocket ship.
All of this is to say that investors should handle Virgin Galactic with care. Don't chase those big upward moves; remember, investment wealth is made over the course of years, less so with lucky trades. Also, bear in mind that after its epic run, this company now carries a market cap of $7.6 billion -- currently with a pittance in the way of sales, less than $100 million in booked reservations, and cash burn that exceeds both amounts. There is lots of work to be done to get this operation off the ground. Any position purchased should thus be very small. For the sake of illustration, if I decided to buy -- which is decidedly less compelling to me than it was in January -- it would be using less than half a percent of my investable net worth.
But why so little? After all, the air travel industry is massive, and if Virgin Galactic can disrupt it there could be far more gains ahead. There's also the track record of the company's billionaire backer to consider.
Nevertheless, I'd personally wait until the fuel propelling the growth stock higher in recent weeks burns off a bit. A very small position (if any) is advisable as it would give a shareholder room to purchase more on the inevitable dips -- without making Virgin Galactic into a core portfolio holding -- on what is sure to be a very wild ride in the months, quarters, and years ahead.