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Why was Virgin Galactic (SPCE) Down in July?
Stock Analysis & Ideas

Why was Virgin Galactic (SPCE) Down in July?

The price of Virgin Galactic Holdings, Inc. (SPCE) shares moved down almost 31.5% last month.

Virgin Galactic is an aerospace and space travel company that operates in the United States. The company designs and manufactures spacecraft and carrier aircraft to focus on the commercial tourism space. (See Virgin Galactic dividend date and history on TipRanks)

What Happened to Virgin Galactic?

Last month, Virgin Galactic’s stock saw a lot of ups and downs, making it extremely volatile.

The first two weeks of July were great for Virgin Galactic’s investors, and the reason is well known around the world. On July 11, for the first time, the company successfully completed its full-crew flight into suborbital space, with CEO Richard Branson becoming the first person to ride to space.

The flight marked the beginning of space tourism, propelling the stock price to new highs.

Unfortunately, Virgin Galactic shares soon fell about 17% on July 12, when the company announced its plan to sell $500 million worth of new stock.

The news did not go well with the investors, as stock selling by management results in dilution and could hurt investor profits sometime in the future.

What’s the Big Deal?

The cash crunch is, indeed, one of Virgin Galactic’s primary issues. The company had only $617 million in cash at the end of the first quarter.

This amount of money is not sufficient for a corporation like Virgin. To become viable as a commercial enterprise, it will need to invest a significant amount in more research and development as well as in other manufacturing facilities.

As a result, such equity issuances are likely to become more common in the future, resulting in considerable dilution and negatively impacting investor sentiment.

What to Expect Next from Virgin Galactic?

Virgin Galactic will report its Q2 financials on August 5 after market close. The company is not yet profitable. Indeed, since 2018, the company has not posted positive earnings per share in any quarter.

Also, the company is still technically in the “test flight” stage of its development and has not begun its commercial operations. Virgin Galactic expects to begin commercial service in 2022, which is still far away.

In light of the fact that Virgin Galactic will be competing with other space tourism companies, namely SpaceX and Blue Origin, the stock is even less appealing. It could be better to avoid this company until actual revenues can be established and a reasonable timeline to profitability can be projected. (See Space Stock Comparison on TipRanks)

Great earnings, on the other hand, are always a game-changer. So, if Virgin Galactic can show some impressive numbers today, which is unlikely, it might be able to earn investor trust to some extent.

Analyst’s View

On July 12, Bank of America Securities analyst Ronald Epstein reiterated a Sell rating on the stock and a price target of $41.00 (33.2% upside potential).

Epstein does not find the risk-reward profile appealing and believes that it is “more skewed to the downside.”

Further, he commented that, “The company is still several years from generating positive cash flow, per our financial projections free cash flow turns positive only in 2025.” He also believes the company will not generate positive free cash flow until 2025.

Wall Street’s Take

The Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 4 Buys, 6 Holds, and 1 Sell. The average SPCE price target of $36.90 implies 19.9% upside potential from the current levels.

Virgin Galactic scores a 5 of 10 from TipRanks’ Smart Score rating system, indicating that the stock is likely to perform in line with market averages.

DisclaimerThe information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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