Shares in Virgin Galactic (NYSE: SPCE) soared close to 25% on Monday to mark its second-best day ever as a publicly-traded company. You might think that this is because it finally launched its first long-delayed commercial flight or perhaps generated some substantial revenue.
Well I’m afraid it’s not that, it’s just some good ol’ fashioned enthusiastic optimism from analysts.
Who is backing Virgin Galactic?
The stock jump came after Bank of America and Susquehanna began coverage of Virgin Galactic, joining six other Wall Street outlets which have given it a buy rating in recent months. These additions are important due to the fact that it now brings Virgin Galactic’s total recommendations to eight firms who each give the company a ‘buy’ rating, with zero labelling it as ‘hold’ or ‘sell’.
“No company in our coverage universe has anywhere near comparable growth potential,” Bank of America analyst Ron Epstein said.
Despite not yet launching a commercial flight, the space-exploration company’s stock is expected to experience growth of 113% according to Bank of America’s $35 price target.
Why are analysts bullish on Virgin Galactic?
There seems to be a number of key reasons for this renewed optimism for the Richard Branson-owned venture, with the following quotes coming directly from Bank of America:
1. No competition
“Virgin Galactic has a unique business with leading market position. The only sub-orbital space tourism competitor in existence (Blue Origin) has not ever flown passengers.”
2. Growth potential
“The long-term opportunities in space tourism and hypersonic point to point travel are nearly revolutionary. Purchasing shares of Virgin Galactic today offers investors the opportunity to get into a company at the very beginning of its growth story. No company in our coverage universe has anywhere near comparable growth potential.”
3. Strong leadership
“Bank of America said Virgin Galactic has a strong management team that includes Chief Space Officer George Whitesides, who spent more than 20 years at NASA, and CEO Michael Colglazier, who spent more than 30 years at Disney, most recently managing its international parks division.”
4. Vertical integration capabilities
“Virgin Galactic’s technology and vertical integration capabilities are unparalleled. There is no company in the world that designs and builds its own aircraft end-to-end and then operates that vehicle commercially. In our view, the steps Virgin Galactic has taken over the past decade to vertically integrate somewhat mitigate execution risk.”
5. Robust addressable market
“The company’s target audience is adults with a total net worth of over $10mn, of which there are currently 2 million worldwide.”
Is Virgin Galactic a risky investment?
Most certainly, yes. First off, Virgin Galactic has absolutely no financial or operating history to speak of, meaning that analysts are essentially flying blind — not ideal for a company that wants to fly straight into the unpredictability of space. This also means that there is no directly comparable business that could help with understanding whether its valuation is too high or low.
Let’s also not ignore the fact that this company is planning to send multi-millionaire tourists into space; the most dangerous ‘terrain’ — if that’s the correct word — known to man. According to NASA, there is a 1 in 276 chance of manned rockets failing fatally. That is compared to the most exaggerated estimates of being in a plane crash — 1 in 11 million — or even a motor accident, which is 1 in 5000. One fatal crash, especially early days, could see Virgin Galactic’s stock tank to business-ending levels.
However, there is also a very lucrative reward if things go right. The potential for commercial space flight is enormous, with Morgan Stanley estimating its worth at $800 billion annually by 2040. As the first mover in the game, Virgin stands to gain the most. As well as that, the technology it is developing for supersonic air travel could be a game changer in the travel industry and replace modern airplanes for good.
However, let’s not get ahead of ourselves, Virgin needs to actually put a commercial rocket in space first.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Editor at MyWallSt
Jamie is the Content Editor here at MyWallSt. His favorite stock is Apple, which is also the first stock he ever bought. Jamie is not only a big fan of its products, but he believes that the tech giant has a whole lot more to give the world, and hasn't even scraped the surface of its potential.