What happened

Shares of Virgin Galactic Holdings (SPCE 6.74%) rocketed higher on Friday after getting the green light from regulators to begin passenger flights. At least one analyst said that jump was too far too fast, causing the shares to retreat as much as 6% on Monday.

So what

Virgin Galactic is behind schedule in its quest to begin passenger space flights, but the company is quickly making up ground. The company's testing regime is back on track, and Virgin Galactic now hopes to have founder Richard Branson on board for a flight as soon as next month.

The Virgin Galactic Unity rockets into space.

Image source: Virgin Galactic.

On Friday, the Federal Aviation Administration (FAA) updated Virgin Galactic's existing commercial space transportation operator license to allow it to fly customers into space. That's a key milestone in the company's efforts to begin service, and markets celebrated the accomplishment by pushing the stock up more than 50%.

Alembic Global analyst Peter Skibitski believes that jump more than fully prices in Virgin Galactic's near-term potential. On Monday, the analyst downgraded Virgin Galactic shares to neutral from overweight, citing valuation.

Now what

To be honest, it is hard to know what is priced in when it comes to Virgin Galactic. The stock is up more than 200% since mid-May, with much of the early climb attributable to expectations that FAA approval was close. If so, this was a rare case where investors bought on the rumor and then bought again on the news.

It seems more and more likely that Virgin Galactic will launch service in the months to come, beginning a journey that investors hope will justify its potential as a multibagger growth stock. But it is also true that Virgin Galactic is a $13 billion market capitalization company with little current revenue and significant challenges up ahead, including questions about its total addressable market.

There's enough potential here for investors to make the stock a small part of a diversified portfolio, but I'd caution against getting too excited, or committing too much capital, until more is known about this next step in the space race.