What happened
It's a tough morning for momentum stocks, and Virgin Galactic Holdings (SPCE -7.92%) is not immune. Shares plunged 18% at the open on Tuesday, and were down more than 8% as of 10 a.m. EST, as investors scrambled for the emergency exits on some of the stocks with the most impressive gains in recent months.
So what
Space tourism start-up Virgin Galactic has had an impressive run, with the stock up 160% over the past six months. But it was up as much as 240% as recently as last week.
The company hopes to begin launching paying customers into space before year's end, but for now has little revenue. It's also behind schedule, in part due to pandemic-related restrictions but also because of some testing misfires in recent months.
The Virgin Galactic Unity spacecraft. Image source: Virgin Galactic.
Up until recently, the market has given Virgin Galactic the benefit of the doubt, intrigued by the potential of the business and willing to look past its sky-high valuation. But on Tuesday, a lot of young companies with substantial valuations were under pressure. There's no news on Virgin Galactic this morning, but the company is part of a trend that has the Nasdaq Composite off by more than 2%.
Now what
Nothing about Virgin Galactic's long-term outlook has changed in the last week. What seems to be changing is how willing investors are to buy into speculative companies. It's hard to predict where the stock goes from here, but it wouldn't surprise me if we are about to enter a period of increased volatility.
Virgin Galactic has incredible promise, but it is also valued by the market at more than $10 billion despite having little revenue coming in and an uncertain schedule for when that will change. The market in recent days appears to be weighing that potential against that risk, and individual investors should do the same.
Those who want to buy into the promise and hold on for the long term need to understand the risks involved. I'd advise limiting Virgin Galactic shares to a small piece of a well-diversified portfolio.
