What happened
We are days away from Richard Branson taking his first space tourism flight aboard a Virgin Galactic Holdings (SPCE -1.09%) spacecraft. For Branson's sake we can only hope the ride will be less turbulent than that of Virgin Galactic's stock.
Shares of Virgin Galactic traded up more than 5% on Thursday, reversing a downward trend in the previous days on the strength of a massive price target boost from one Wall Street bank.
So what
Virgin Galactic shares blasted off on June 25 after the company won approval for passenger space flights, clearing the way for Branson's planned July 11 flight. But the stock spent much of the next week reversing those gains as analysts questioned whether the run-up had been too much, too fast.
Image source: Virgin Galactic.
This week has been mostly more of the same, with Wall Street analysts expressing excitement about the upcoming flight but doubts about the valuation. But on Wednesday, Cowen analyst Oliver Chen gave the bulls a boost, lifting his price target to $51 from $23 and keeping an outperform rating on the shares. Chen wrote that Branson's upcoming flight makes him more positive about Virgin Galactic's chances to launch regular service by 2022, and should give Virgin Galactic a chance to market itself as "an experiential and luxury leader in commercial space flight."
Indeed, while competition, including from Jeff Bezos' Blue Origin, is coming fast, Virgin Galactic hopefully will be able to use Branson's Virgin Group cache to differentiate itself. The Virgin Galactic experience also seems more user-friendly, with the initial lift provided by an airplane instead of a rocket and a smooth glide back to Earth instead of a sharp drop.
Now what
Shares of Virgin Galactic have now climbed more than 220% from their mid-May low, but still haven't reached the lofty heights they hit in February. Branson's flight is a clear catalyst for the stock, and recent history suggests that this is a stock that will move once on the anticipation and then again on the news, meaning however much excitement about this weekend is priced in right now, the stock is still likely to react again next week.
Virgin Galactic is definitely moving in the right direction, and the odds are improving that the company will be running regular tourism flights by early next year at the latest. There's good reason for investors to be excited.
However, this remains a risky proposition. Space is hard, and the near-term total addressable market for six-figure tickets to the edge of space is small. Virgin Galactic, despite generating little revenue, is valued by the market at nearly $12 billion, meaning that a lot of the future potential growth is arguably already priced into the shares.
Investors with a stomach for turbulence and excited about the opportunity should feel better about their holding now than they did two months ago. But given the risks, this is a stock still best left to a small part of a well-diversified portfolio.
