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Why Virgin Galactic Stock Dropped 11% This Morning

By Rich Smith - Updated May 4, 2020 at 8:41PM

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Virgin Galactic's biggest shareholders might be heading for the exits.

What happened

On Friday, May 1, after the close of trading, Virgin Galactic (SPCE 4.32%) filed an S-1 form with the Securities and Exchange Commission, advising that certain "selling stockholders" of the space tourism company intend to sell a combined 150.5 million shares of Virgin Galactic stock.

In an email from the company, Virgin Galactic clarified that "under the registration rights agreement between Virgin Galactic Holdings and SCH in connection with our 2019 merger, Virgin Galactic Holdings had a contractual obligation to file a shelf registration statement within 6 months of the closing to register the shares of Virgin Galactic Holding stock owned by several stockholders."

Nevertheless, on Monday, May 4, the first trading day after the announcement, Virgin Galactic stock dropped as much as 11.4% before regaining some lost ground. As of 12:20 p.m. EDT, Virgin Galactic shares are down 4.2%.

Big red arrow superimposed over a stock chart.

Image source: Getty Images.

So what

Is this an overreaction to Virgin Galactic's news? I think not.

Consider: First and foremost, this is not a "secondary issue" of Virgin stock sold by the company in order to raise cash. All the proceeds from the sale of these shares will go to the shareholders exiting the stock.

Second, consider the size of the rush to the exits represented by this sale. In its filing, Virgin notes that it currently has 210.4 million shares outstanding. The shares about to be sold represent a staggering 71.5% of all shares now outstanding.

Now what

The number of shares represented by this planned sale strongly suggests that Virgin Group -- and its owner Sir Richard Branson -- is getting ready to liquidate almost its entire 114.8 million-share stake in Virgin Galactic, owned via Vieco 10 Limited. It also appears that Chamath Palihapitiya, the CEO of Social Capital Hedosophia Holdings, the publicly traded shelf company into which Virgin Galactic merged last year, is preparing to sell all or most of his 33.8 million-share stake in Virgin Galactic. And if that's the case, one has to wonder if this company's growth prospects are really as strong as promised.

Although there is no indication in the company's filing that sales will begin imminently -- the planned sales are described as "from time to time" -- the implication that investors seem to be drawing from Friday's filing is that if Virgin's biggest shareholders are even just contemplating an exit, maybe smaller investors should, too.

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Virgin Galactic Holdings, Inc. Stock Quote
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