Space tourism company Virgin Galactic (SPCE) has been a strong performer since going public through an SPAC (Special Purpose Acquisition Company) merger in October 2019. Share prices reached a high of almost $34 in February 2020 before the broader market sell-off, then hit almost $60 this February. However, news that SPAC sponsor and 10% shareholder Chamath Palihipitya has sold his entire position may be a sign of trouble ahead for the company. Therefore, investors should proceed with caution.
It’s easy to see why investors would have concerns about the value of this stock. While space tourism could be a large and profitable industry in the foreseeable future, the company reported that it lost $273 million in 2020, has not started human commercial space flights and expects costs to increase in the coming years.
At the end of 2020, Virgin Galactic had $663 million in cash on its balance sheet. If it expects losses to grow beyond 2020’s loss, it stands to reason that the company will need to either start earning money from operations very soon or seek new investment within the next two years.
Virgin Galactic is not the only company in this emerging sector, and investors should be concerned about the effects of competition on this company. While competition drives innovation and service levels for consumers, it might also mean that each individual competitor has a hard time achieving scale and profitability.
Both SpaceX from Tesla (TSLA) CEO Elon Musk and Blue Origin from Amazon (AMZN) founder and chairman Jeff Bezos seem likely to pose stiff competition for Virgin Galactic in the coming years. When the business does become viable, well-funded companies could seek to gain market share by underpricing their service for years.
Although it’s true that venture capitalists and early-stage investors achieve the highest returns by investing in startups and companies that don’t generate revenue yet, Virgin Galactic’s valuation might be high enough to suggest that the highest returns are in the rearview mirror. With over 236 million shares outstanding at a price of $30.20 per share, that represents a valuation of over $7 billion.
In light of the concern about funding ongoing losses, investors should not count on any margin of safety from the company’s large pile of cash; management already said they’re planning to spend that money on developing the company’s core service.
So, when an insider such as the company’s chairman and 10% owner starts selling, investors should pay attention. It seems very likely that he is signaling he either doesn’t see a road to growing profitability or he is aware of a reason to “get out while the getting is good.”
Analysts Weigh In
Meanwhile, Wall Street analysts are cautiously optimistic about the company. 3 Buys and 5 Holds add up to a Moderate Buy consensus rating. At $36.13, the average analyst price target implies 20% upside potential. (See Virgin Galactic stock analysis on TipRanks)
Following the recent insider trading developments, we might expect analysts to revise these price targets downward.
Virgin Galactic might have a bright future ahead, but for the reasons described above, it seems like individual investors should consider following the lead of the company’s chairman and “taking some chips off the table” so-to-speak by selling shares of SPCE.
Disclosure: On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.