Please ensure Javascript is enabled for purposes of website accessibility

Why Virgin Galactic Stock Dropped Today

By Rich Smith - Mar 16, 2021 at 12:24PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The WSJ highlights a vulnerability in SPAC stocks.

What happened

Shares of Virgin Galactic (SPCE 4.69%) stock are down 3% in late morning trading Tuesday, at 11:45 a.m EDT.

There's no particular news of note driving the stock lower today, but there may be a residue of worry holding over from a report that The Wall Street Journal put out over the weekend, warning of short sellers' rising interest in shorting stocks of special purpose acquisition vehicles, and the stocks they have sponsored in IPOs -- stocks like Virgin Galactic.  

Glowing red stock chart arrow trending down

Image source: Getty Images.

So what

"Short sellers are coming for SPACs," warns the Journal, noting that "the dollar value of bearish bets against shares of SPACs has more than tripled to about $2.7 billion [since] the start of the year."

And shorts aren't just attacking SPACs per se -- blank check companies that have been formed for the purpose of finding a private company, buying it, and conducting a reverse merger to bring it public. They're also "wagering against companies after they combine with SPACs."

Indeed, as the paper points out, "postmerger companies" such as Virgin Galactic, which came public via SPAC in late 2019, "are particularly attractive to short because they have larger market capitalizations, making their shares easier to borrow, and because early investors in the SPACs are eager to sell shares to lock in profits."

Now what

That could make Virgin Galactic a particularly tempting target for a short attack. Valued in excess of $8 billion today, but with no profits and almost no revenue, Virgin Galactic already looks overvalued by traditional metrics, giving the stock a lot of room to fall. Worse, Virgin Galactic recently announced that it will postpone test flight operations on its spaceplanes until May, essentially guaranteeing short sellers that the company will report no revenue before then -- and possibly no revenue through the end of this year.

With some skeptics now predicting that Virgin Galactic won't be able to start up commercial operations before 2022, Virgin Galactic shares could remain in short-sellers' crosshairs for a long time to come.  

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Virgin Galactic Holdings, Inc. Stock Quote
Virgin Galactic Holdings, Inc.
SPCE
$6.47 (4.69%) $0.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
322%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.