The commission-free trading app Robinhood offers a good heatmap of where retail investors are putting their money on any given day. And while some popular stocks among those using the service are considered questionable investments by veteran stock traders, others have real potential to deliver explosive returns.
Two stocks that fit into that latter category are Virgin Galactic (SPCE -11.74%) and MGM Resorts (MGM 0.90%). Let's explore the reasons why these two stocks could skyrocket.
1. Virgin Galactic: to infinity and beyond?
Virgin Galactic is a fledgling space tourism company that appeals to Robinhood investors because of its high-stakes business model and all-or-nothing catalyst for growth. Either the company successfully sends passengers to space, or it doesn't. But despite the risks, Virgin Galactic looks poised for success because of its strong balance sheet and convincing progress toward getting its spaceplanes ready for commercial operation.
Image source: Getty Images.
As of the second quarter of 2020, Virgin Galactic has completed 27 of 29 elements required for it to receive Federal Aviation Administration (FAA) clearance to fly paying customers. The company plans to complete the remaining milestones by the first quarter of 2021 before sending founder Richard Branson to space on its inaugural fully approved flight. Paying customers could follow soon after.
Virgin Galactic has a backlog of interested passengers, which suggests it will experience healthy demand for its space flights when things are up and running. The company reports 600 pre-paid customers and almost 900 enrolled in its "One Small Step" program of potential candidates. The company plans to conduct 400 flights per year per spaceport (tickets are expected to cost $250,000), and it currently operates one spaceport called Spaceport America, located in New Mexico.
Virgin Galactic reported a net loss of $77 million in the third quarter, but cash and equivalents stand at $742 million as of Sept. 30 -- that's more than enough runway before commercial operations start, assuming things kick off in the first half of 2021, and cash burn doesn't dramatically increase before then.
2. MGM Resorts: betting on a comeback
MGM Resorts is a casino and resort operator known for iconic properties like the Bellagio and MGM Grand in Las Vegas, as well as a slew of high-profile properties in Macao, China. The company took a hit from the coronavirus pandemic, which reduced tourism traffic to its casinos. But it is poised for a rebound as the tourism industry slowly recovers.
MGM can also exploit its established brand to pivot to the fast-growing sports betting market.
MGM's net revenue declined 66% to $1.1 billion in the third quarter of 2020. However, the worst impacts of the pandemic look to be behind the company as it takes convincing steps to normalize operations. All U.S. properties are now open, and China is easing travel restrictions between mainland China and Macao, which could bring more tourists to the gambling hub.
Image source: Getty Images.
MGM's exposure to the coronavirus pandemic makes it a high-risk stock, but the company is well suited to survive these challenges because of its liquidity. MGM reports $7.8 billion in liquidity as of Sept. 30 -- including $3.2 billion in revolving credit. Consolidated debt stands at $11.5 billion, with no maturities until 2022 (when $1 billion comes due).
MGM plans to power its next leg of growth with sports betting and online gambling -- a combined market management expects to be worth $20.3 billion by 2025. The company has established a leadership position in this industry with its BetMGM app, which takes advantage of the company's brick-and-mortar casino brand to power customer acquisition. MGM expects to maintain a 15%-25% market share in this fast-growing market.
With risk comes reward
Looking at the stocks that are popular among users of Robinhood, it would seem its investors often gravitate toward risky stocks with the potential for explosive returns. So it's no surprise that Virgin Galactic and MGM Resorts are popular on the platform.
Virgin Galactic is better for investors who want to position themselves at the forefront of the brand-new space tourism industry. MGM Resorts is a better pick for investors who want to bet on a rebound in the gambling industry when the coronavirus pandemic subsides.
