Warren Buffett says to be greedy when others are fearful, but that can be extremely hard to do in reality. When stocks are falling, there's normally a reason. But sometimes that reason was a short-term phenomenon, and the long-term investment thesis is still intact.
We're seeing a lot of fear in Virgin Galactic (SPCE 2.13%) right now, with the stock down 73% from its all-time high and concerns about its test flight schedule and insider selling. These are all valid concerns, but it's important to put them into context against a long-term view of the company and its stock, because this could be a growth stock for decades to come.
Image source: Virgin Galactic.
Delays, EMI, and engineering mumbo jumbo
The biggest reason Virgin Galactic stock has fallen over the last few months is because of delays in its flight tests, and thus its commercial space flights. Investors never like delays, especially when it's somewhat open-ended what the timeline is going to be in the future.
To its credit, in the recent first-quarter conference call Virgin Galactic's management went into extraordinary detail to highlight what it is fixing on the Unity spacecraft and how the fixes are going.
When a December flight showed that a rocket booster didn't reach space as planned, it caught investors off guard. Delays were announced, and in February it was revealed that electromagnetic interference, or EMI, was the cause of the rocket booster not igniting. EMI is something that aerospace engineers have to worry about regularly, and in this case a new computer on Unity caused more EMI than expected, resulting in the rocket motor computer losing connection.
As with any problem on a new aircraft, once the issue was diagnosed, engineers and technicians went about fixing the issue and testing the results. Some hardware and shielding changes resulted in a big improvement, as Mike Moses, president of space missions and safety, said on the conference call:
As of today, the final installation of the flight hardware is complete, and an end to end checkouts, we were able to compare the current EMI to previous levels, and we can see that we've significantly reduced the EMI on the order of 10 to 20 decibels.
He went on to say that EMI intensity was reduced by over 90%, so this mission was accomplished as planned.
The more surprising announcement during the conference call was that the Eve aircraft, which is the aircraft Unity is attached to and brings to altitude before detaching, saw a "potential wear and tear issue." As with any aircraft, there are inspections before and after flight, as well as regularly scheduled maintenance. In this instance, some regular maintenance may need to be moved up, with Moses saying:
Following this last inspection, we identified an item on our maintenance calendar that needs further study to determine whether we need to take action now instead of the fall as planned. Because this issue just emerged at the end of last week, we are still determining what steps may be necessary to address it. While this may impact our flight test schedule, I want to emphasize that this is the nature of a test flight program. And we're going to take the time we need before moving forward.
There are a few takeaways I have from this delay. One is that the rocket failure in December didn't result in any casualties because safety features allowed the aircraft to glide back to earth. This shows safety designed into the system. A second is that Virgin Galactic is taking its time completing fixes and running tests before further flights. For long-term investors, this is a good thing. The absolute worst thing that could happen to Virgin Galactic is a spacecraft failure during flight, which could cost lives and literally sink the company. Safety should be first, whether that means weeks or months of delays or not. Third, and maybe most important, this is what happens in cutting-edge aviation. Running into problems, making fixes, and overcoming challenges are par for the course. It's just not normal that these challenges happen as openly and publicly as they are at Virgin Galactic.
There may have been a lot of engineering detail in the first-quarter conference call. But as an engineer, I heard that there were problems the company found during a flight, as we should expect, and they're being fixed. I also heard that safety systems worked as planned and will continue to be a priority, even as the stock falls. As a shareholder, I think these are the right priorities, and we should expect Virgin Galactic to have delays from time to time as it learns more about flying to space.
My biggest worry
Delays don't worry me if they improve the safety and performance of Virgin Galactic's spacecraft long-term.
What does worry me is Virgin Galactic founder Sir Richard Branson and Chairman of the Board of Directors Chamath Palihapitiya selling stock over the last few months. Palihapitiya sold about $213 million of Virgin Galactic shares in March, and has sold about 10 million shares he controls since December 2020. Branson could sell 25 million shares, or 22% of his stake in the company, as a result of a filing in May, which follows $150 million in sales in April.
As insiders and board members, Palihapitiya and Branson are privy to more information about what's going on internally at Virgin Galactic than we are as public investors. And if they're selling it's a red flag for me, even if they give compelling reasons to do so publicly.
The bottom line
Given everything we know about Virgin Galactic today, I see little reason to change the long-term outlook for this potentially disruptive stock. Here are a few things to keep in mind:
- Safety should be the #1 priority, even if that means delays.
- A delay on the order of a few weeks or months doesn't affect Virgin Galactic's potential market long-term.
- Problems, fixes, delays, and learning are all par for the course in a new industry like space travel, and should be seen as opportunities for improvement.
- There is no indication that reservation holders are jumping ship.
If you thought Virgin Galactic was a great stock with enormous potential to disrupt how we think about travel at $50 per share, then you should love it at $17 per share. I don't see anything that's changed about the company's long-term outlook in the last few months except that fear of the unknown has taken over the market. But the unknown is exactly what investors signed up for in this completely uncharted space tourism business.
