Virgin Galactic Holdings (SPCE) is an American spaceflight company that is part of the Virgin Group. The company designs commercial sub-orbital spaceflights for space tourism.
The share price of Virgin Galactic has dropped substantially in recent weeks as the company was forced to postpone the launch of its first commercial test flight.
The company appears to be a long way away from generating actual revenue, as it continues to postpone the launch of commercial spaceflights due to material quality issues. Even if the spaceflight test becomes a success, the company would still be exposed to a very small total addressable market.
Based on these reasons, I remain neutral on the prospects for Virgin Galactic for the next 12 months. (See Analysts’ Top Stocks on TipRanks)
Postponement Raises Red Flag
Virgin Galactic successfully completed its first fully-crewed flight on July 11. The company plans to conduct one more test flight with the Italian Air Force before starting commercial flights, which is now postponed until the fourth quarter of 2022.
Virgin Galactic’s SpaceShipTwo was grounded in August as it flew out of its protected airspace. The Federal Aviation Administration investigated the company’s test flight which unexpectedly drifted from its path for one minute and 41 seconds when it returned to the New Mexico desert.
The FAA approved the company to resume flights in late September, but the Unity13 test flight, which was scheduled to take off this month, has been postponed until next year. This is due to material defects discovered during laboratory tests. As a result of this delay, commercial space flights will not be launched until the fourth quarter of 2022.
While commercial space companies are heavily investing in space tourism, the question of safety remains a major concern. One of Virgin Galactic’s test pilots was killed in a crash in 2014 during a test flight, putting the company’s mission on hold for several years.
As a result of such failures, it’s unclear how the space exploration company would encourage people to join risky missions. On October 15, the company announced that test flights will be suspended for nearly nine months to improve its spaceships. This disappointed investors, who expected the company to start commercial spaceflights in early 2022.
Virgin Galactic’s ability to address technical problems, as well as its emphasis on safety and improvement of spacecraft, will benefit the company in the long run. However, the flight delays and associated uncertainties have now become worrisome as this is not the first time the company was forced to delay test flights.
Besides flight delays, another source of concern for investors is that Virgin Galactic’s top executives have been selling the company’s stock. After selling over half a billion dollars worth of shares in May 2020, Sir Richard Branson sold another $300 million worth of shares of Virgin Galactic last August.
Chamath Palihapitiya, the chairman of Virgin Galactic, sold $213 million of stock in March as well.
Wall Street’s Take
UBS analyst Myles Walton downgraded Virgin Galactic stock to a Sell on Monday, decreasing his price target to $15 from $26 based on the continued delays in launching commercial flights.
Virgin Galactic has a Hold consensus rating, based on four Buys, three Holds, and three Sells assigned in the past three months. The average Virgin Galactic price target is $30.30. This implies 50.4% upside potential from the current market price.
Takeaway
Virgin Galactic had a successful start to 2021, but the stock price has fallen ever since the flights were grounded last August.
Shares were trading at an all-time high at the time the company was preparing for its crewed test flight in July. However, the market sentiment has deteriorated since then due to several negative developments.
The short-term performance of Virgin Galactic stock will be determined by the outlook the company’s management will paint in early November along with its third-quarter financial results.
Investors will be interested in learning more about the expected improvements in spacecraft, the launch date of test flights, and the demand for flight tickets.
The long-term performance of the stock, however, will mostly depend on the fundamentals of the company. For now, there is no certainty regarding the ability of Virgin Galactic to become profitable in the long run.
At the time of publication, Dilantha De Silva did not have a position in any of the securities mentioned in this article.
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