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As Delays Cause Virgin Galactic (SPCE) Shares to Dip, Should Investors be Buying?

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Based in Las Cruces, New Mexico, Virgin Galactic Holdings, Inc. (SPCE) is a vertically integrated aerospace company that develops air and space vehicles and also offers human space flight for private individuals and researchers in the U.S.

Shares of SPCE have experienced selling pressure amid delays associated with the start of commercial flights.  The stock dropped by about 20% over the past month. In addition, SPCE stock has dropped around 15% year-to-date (YTD), underperforming its benchmark, Procure Space ETF (UFO), which has gained 21.7% over the same period. 

In this article, I will analyze SPCE stock to see whether it’s a good idea to scoop up its shares on the dip. 

Recent News 

On October 14th, Virgin Galactic announced that it would delay its commercial space tourism service to 4Q2022 as it plans to perform an enhancement program for VMS Eve and VSS Unity. The enhancement program is set to make the vehicle safer and more robust, and reliable over the long term. The Italian Air force test-flight, known as Unity 23, was also rescheduled from late October to early 2022.  

However, this news was not perceived as positive by investors and analysts. As a result, investor sentiment turned to bearish, with a relatively high short interest of 15.97%. In addition, Morgan Stanley decreased its price target to $17 from $25 amid delays and lock up expiration on October 25th. UBS also downgraded the stock to sell from neutral, cutting its price target to $15 from $26 due to the rescheduling of the Unity 23 test flight. 

Financial Overview

It is worth mentioning here that the company currently generates only a small amount of revenues before the start of its commercial tourism flights. The company’s most recent 10-Q report revealed revenue of $571,000 primarily due to the spaceflight of two payloads in May 2021, more than the $130,000 analysts expected. However, the company reported Q2 GAAP EPS of ($0.39), missing Wall Street consensus by $0.06.

Additionally, the company reopened ticket sales with a starting price of $450,000 per seat, up 80% compared to its previous price of $250,000. More than 600 individuals have already booked a trip to space. 

With a net cash position of $525.13 million, the company’s liquidity position remains strong. It also has a healthy Total Debt to Equity ratio of just 5.95%. Also, analysts expect that SPCE’s EPS should improve by about 17% YoY to (0.28) in Q3, while revenue should stand at $1.64 million. 

Although the company’s stock has dropped, valuations remain stretched. For instance, the company trades with an FWD EV/Sales 2,590.92x and FWD P/B of 7.29x. These extremely high figures can contribute additional pressure on the stock.   

Bearish Options Market Sentiment 

Taking a look at the November 19th, 2021 options, we can determine the expected price movement using the options long straddle strategy. Applying this approach, my calculations imply that SPCE stock could rise or fall by about 16% by mid-November from the $20.00 strike price. In SPCE’s case, we can also see 1,526 open calls to 3,336 open puts. So, the ratio between the open call options and put options is roughly 0.45x, which means that overall options market sentiment is currently bearish for Virgin Galactic stock, suggesting that the recent sell-off may continue.

Conclusion

I think SPCE stock should be avoided at the moment. The company has experienced massive downgrades after its commercial launch delays. With a high short float ratio, retail traders and investors appear to be pessimistic regarding SPCE stock for now. In addition, the lock-up period expires on October 25th, thus insiders may decide to cash out their positions, causing the stock to drop even further. Finally, the options market sentiment for SPCE stock is bearish at the moment.

Wall Street analysts have rated SPCE stock as a “Hold”, with an average price target of $30.30.

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Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. Oleksandr focuses his trade strategy around “special situations” (such as catalysts, potential acquisitions, or spin-offs) and how to make money from those catalysts, as direct stock purchases, combined with option-based approaches for risk minimization.

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