There are some extremely high-potential companies on the market that could generate 5x returns over the next decade. But they aren't without their own risks.
What I wanted to do is ask whether a high-risk, high-reward company like Virgin Galactic (SPCE -16.20%) is more likely to 5x before Axon (AXON -1.02%), a stock that is up 542% in the last five years. Let's dig into how both stocks could go up big over the next decade.
Risk versus reward
First, I want to outline what these companies do and why their risk profiles are very different. Virgin Galactic is building a space tourism company, charging $400,000 or more for the privilege of flying into space for a short time. But it has yet to launch commercial operations, which you can see in its revenue and free-cash-flow numbers.
SPCE Revenue (TTM) data by YCharts.
Axon is an established company making tasers, body cameras, and cloud services for law enforcement. Not only is this now a company with $1 billion in revenue, but it also has $3.73 billion of future contracted revenue extending as far as a decade into the future.
AXON Revenue (TTM) data by YCharts.
This is a speculative company versus a company that needs to continue executing at a high level.
The risk at Virgin Galactic is going to zero
Virgin Galactic's market cap is $1.1 billion, and the company currently has $1.1 billion in cash on hand with no debt. But the problem is that the company is burning about $100 million per quarter in operations, which will likely continue until commercial operations get off the ground.
The downside for this company is zero, but I also think the upside is well over 5x, given its potential to generate $1 billion in revenue from a single spaceport. If Virgin Galactic gets commercial operations off the ground next year, it could start a decade-long growth phase for the company.
The space tourism business is completely unproven, and we don't even know if the company's rockets are reliable. With high reward comes very high risk.
Axon isn't without risk
For Axon, the picture seems much clearer, but there are questions to answer long-term. As much as I like Axon's growth, you can see above that the company isn't generating much free cash flow or reporting a consistent net income.
There's also the valuation risk we need to consider. Axon's $12.2 billion market cap is about 12x sales, and if net margins long-term aren't as high as investors hope, the stock could fall back to earth. I don't think the risk is zero, but it will be hard to 5x from here if profits don't show up soon.
Virgin Galactic is more likely to 5x, but there are risks
Axon is clearly the more proven company here, but its size and valuation make me think it will be tough for the stock to 5x from here.
Virgin Galactic is a much higher-risk stock, but the company's valuation going up 5x or even 10x is plausible if it gets operations off the ground. That's not a guarantee, but management says commercial operations are "on track to launch" in Q2 2023, and next-generation spaceships that can carry six passengers are due to arrive in 2025. In the next five to 10 years, the stock could easily jump 5x if touring space becomes common.
But with any high-reward stock, there are high risks. That certainly goes for Virgin Galactic today.
