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Why Virgin Galactic Stock Yo-Yoed Up Another 6% This Morning

By Rich Smith – Updated Oct 1, 2020 at 1:07PM

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Investors can't quite get that Bank of America price target out of their heads.

What happened

Shares of Virgin Galactic (SPCE 3.15%) were bouncing back today to where they were Monday, gaining nearly 6% in early trading and still up a respectable 3% as of 12:25 p.m. EDT on Thursday. Shares had popped 25% on Monday after a pair of Wall Street analysts urged investors to pile into the space tourism pioneer's stock ahead of its upcoming Q3 2020 earnings release on Nov. 5.  

But investors piled back out of Virgin Galactic on Wednesday, when CNBC reported notes of caution from other analysts who worried that Virgin Galactic is still not profitable. And it might not ever become profitable, they said, if the high price it plans for tickets aboard its space planes limits the potential client base.

Virgin Galactic SpaceShip2 rocketing near vertically

Image source: Virgin Galactic.

So what

Virgin Galactic isn't likely to make its first revenue-generating spaceflight for at least three more months, and won't report new financial numbers until next month. So why are investors bidding the stock back up today? Looking at the variety of price targets Wall Street floated earlier this week (Susquehanna saying at least $20 a share, and Bank of America (BAC 0.38%) suggesting it could be worth $35), I wonder if investors might be interpreting this as establishing a range of possible outcomes for the stock.

If investors believe that Virgin Galactic could be worth nearly twice what it costs today, and at the very least is worth $20, they may decide that any price below $20 makes it safe to invest in Virgin Galactic. (It was trading for just under $20 at 1 p.m. today.) 

Now what

The truth is that the stock is anything but safe. For one thing, because Virgin Galactic has no revenue, it has no profits, and no profit margins. Accordingly, investors have no idea how profitable this company will be if and when it gets up and running.

And the safety issue must be addressed. Virgin Galactic suffered a pilot fatality six years ago, but that test flight carried no passengers. Once it begins carrying passengers, if a crash occurs, we don't know how well the company will handle the blow of such a disaster, or whether the business could even survive it.

None of the above means you shouldn't invest in Virgin Galactic. Just don't assume that the stock is without risk because it costs less than what a couple of analysts say it might sell for a year from now.

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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Virgin Galactic Holdings Inc Stock Quote
Virgin Galactic Holdings Inc
SPCE
$4.91 (3.15%) $0.15
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