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Why Virgin Galactic Stock Slumped 5% Today

By Rich Smith – Jun 23, 2020 at 3:27PM

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What went up just came back down.

What happened

Shareholders of Virgin Galactic Holdings (SPCE -2.01%) had a good day on Monday, when reports that NASA had contracted with the company to recruit and train "private astronauts," before NASA flies them to the International Space Station (ISS), helped push Virgin Galactic shares up 16% in a single day of frenzied trading.

Today, however, the enthusiasm is fading, and Virgin Galactic stock is fading with it, down 5.5% on the day.

WhiteKnightTwo in flight

Image source: Virgin Galactic.

So what

Given the rapidity of Virgin Galactic's move higher on Monday, what we're seeing today could simply be an instance of investors taking a few chips off the table, and locking in a bit of their paper profits, just in case the rally doesn't last.

But if investors sour on Virgin Galactic, here's why I think that might happen: First and foremost, the NASA contract announcement didn't name any price that Virgin Galactic will be paid for its services. And absent some really impressive number, I wonder if what Virgin will be paid for identifying and training a handful of astronauts, and even any fees it might collect for "procurement of transportation to the ISS" are really going to be very lucrative projects.

Note that NASA isn't hiring Virgin to actually build spaceships capable of reaching the space station, but simply to find someone else who can build them.

And I really doubt that, once you add all these monies up, they're going to be enough to justify Virgin Galactic's current $3.2 billion market capitalization.

Now what

When you get right down to it, these are ancillary endeavors that Virgin Galactic is taking on: good headlines for the company to boast about, but financially more of a molehill than a mountain. For Virgin Galactic to justify its $3 billion-plus market cap, it really needs to get its first flight of paying customers airborne and then launch them into space, begin selling more and more $250,000 tickets, and then produce an income statement that will prove conclusively that this is a business Virgin can operate at a profit.

Until Virgin Galactic does that, I expect this stock to have as many down days as up.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Virgin Galactic Holdings Inc. The Motley Fool has a disclosure policy.

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