Virgin Galactic’s stock price experiences a 25% decline due to a test flight failure. However, it still has the potential to be a long-term winner.
Virgin Galactic Holdings (NYSE: $SPCE), an American Spaceflight Company, experienced a test flight failure causing its stock price to dip over 25%. On December 12, 2020, Virgin Galactic launched a test flight of the Spaceship Two Unity that did not go exactly as planned.
Here’s what you need to know:
On December 12, 2020, Virgin Galactic aborted its test flight due to technical failures concerning the rocket motor. Virgin Galactic’s post-flight analysis reported that the “onboard computer which monitors the propulsion system lost connection, triggering a fail-safe scenario that intentionally halted ignition of the rocket motor.”
Although the flight did not reach space as planned, the plane was still able to land successfully.
“Our flight landed beautifully, with pilots, planes, and spaceship safe, secure, and in excellent shape — the foundation of every successful mission!” – CEO Michael Colglazier
Even though the failed test flight is a setback for SPCE, the successful landing by the pilots displays Virgin Galactic’s ability to handle unexpected events. The ability to demonstrate fail-safe systems is a positive for the company as it will provide a sense of reassurance to future customers. The worst-case scenario would have been the plane not landing safely, resulting in tragedies. This would have been even more detrimental to Virgin Galactic’s stock price.
After the aborted test-flight, the stock price decreased by approximately 25% from December 14th to December 31st. The aborted test-flight as well as the decline in the stock price caused investors to reassess their position. However, this decline isn’t something that investors need to worry about. In fact, this is the perfect buying opportunity for long-term investors.
The test-flight failure is only a setback not a major tragedy for the company. The entire flight was aborted because the computer monitoring the rocket motor lost connection. After the plane landed successfully, Virgin Galactic began evaluating data to assess the root cause of this communication loss.
Since this technical failure is not a serious issue for Virgin Galactic, the company plans on conducting a repeat of this test-flight along with two other test-flights in Q1 of 2021.
Why SPCE can seem speculative at this point
One of the main setbacks that Virgin Galactic continues to face is a delay in test flights due to COVID-19 restrictions in New Mexico. If coronavirus cases continue to rise, then it could possibly hinder Virgin Galactic’s timeline for test-flights as well as commercial space flights in the near future.
SPCE currently generates little to no revenues. Thus, an investment in SPCE is not based on solid financials and proper valuations. If Virgin Galactic wants to advance and achieve its revenue-generating goals, then a successful test flight is crucial.
What is a driving force for this company? Ambition. Let’s not forget that one of the main objectives here is to launch civilians into space. Will Virgin Galactic be able to accomplish that task successfully? Time will tell. This will not be an overnight success. In fact, SPCE will continue to face a series of challenges amid the COVID-19 pandemic.
This stock may be speculative, but it is a worthy play.
Is there an addressable market for space tourism?
Virgin Galactic has already sold more than 600 tickets, each ticket ranging from $200,000 to $250,000. The company is not currently selling any tickets but is planning on resuming sales after Richard Branson’s test flight. Even though these ticket prices are more suited for high net worth individuals, there is still a large demand.
The leadership at Virgin Galactic are unsure about the cost of ticket prices when they resume sales, but expect that the prices will increase due to significant demand. If Richard Branson successfully completes his journey in the first quarter of 2020, it can be anticipated that Virgin Galactic will gain more traction and ticket sales.
According to Cowen’s Survey, “Virgin Galactic suborbital flights have a total addressable market of about 2.4 million people, among individuals with a net worth of more than $5 million.” Out of the 2.4 million people, Cowen’s Survey estimates that “39% are interested in paying at least $250,000 for a ticket.”
However, if ticket prices continue to rise in the future then there may be a decline in potential customers.
Laura Forzyk, owner of US space consulting firm Astralytical, states “if space tourism is seen as a once-in-a-lifetime purchase and the price isn’t lowered to increase the customer base, potential customers will decline once operational flights begin.”
Charging $250,000 per ticket may seem excessive, but necessary to support Virgin Galactic’s business and operational plans. As space travel becomes more of a common occurrence and Virgin’s Galactic’s technology becomes proven, ticket prices may be significantly reduced to tens of thousands of dollars after 10 to 15 years. This will certainly broaden the market for space tourism in the future.
The exciting thing about the future of space tourism is that it has large growth potential. Although the company may face competition from companies, such as SpaceX and Blue Origin, Virgin Galactic is focusing on a different objective and market. Competition from SpaceX isn’t necessarily a negative for Virgin Galactic. Fierce competition between these two companies can be seen as a positive as it will likely place Virgin Galactic in the spotlight.
Only a handful of space companies are available to investors and we expect Virgin Galactic to be a strong, emerging leader in the human spaceflight industry.
“Space Tourism will be a $3 [billion plus per year] opportunity growing at double-digit rates” – UBS
One of the positives about Virgin Galactic is that it has the potential to be a massive revenue generator. In the Q3 earnings call, CEO Michael Colglazier announced that the company plans on establishing multiple spaceports as well as launching 400 flights per spaceport each year. If the company can successfully complete this objective, then it will generate $1 billion in revenue per spaceport.
Does SPCE deserve a spot in your portfolio?
Although Virgin Galactic’s unsuccessful test flight may have caused its stock price to plummet over 25%, this setback is hardly a deal-breaker. The computer may have lost connection during the flight triggering a failsafe scenario but the pilots were still able to handle the unexpected event and land safely.
This is good news. Safety is crucial to Virgin Galactic’s success and provides reassurance to its current and potential customers.
Even though Virgin Galactic may not be generating any revenues right now, investors should not have any high expectations for the company at this stage. Patience is key when investing in a company like Virgin Galactic because they will certainly see volatility in the short-term.
With that being said, do you have the patience to ride out this bumpy wave? If not, then it’s time to reevaluate your position. It is important to acknowledge that Virgin Galactic Holdings will not just be an overnight success. This is about revolutionizing human space travel.
It’s easy to be overly critical of Virgin Galactic’s objectives and business operations. What Virgin Galactic sets to accomplish takes a remarkable effort. This is a long-term story.
A decline in SPCE’s stock price is the perfect opportunity for investors to rack up shares and hold for the long-term.
In the meantime, buckle up, hold on tight, and get ready to ride out the turbulence.
$52 price target in 2021 ?