Risk/Reward Rating: Negative
Virgin Galactic Holdings is rallying 30% on news that the FAA has amended their license to allow commercial passengers in the future. This is not news to most observers as the entire premise of the company is based on this ability. If there were any fear of this not happening, the stock would have been trading at much lower levels prior to today as the company is burning money with no revenues and an extreme valuation.
Valuation: The company has a book value of $1.74 per share and is trading at 30x book value. Virgin Galactic generates $0 revenue and is not expected to be profitable for the foreseeable future.
Further dilution of shareholders appears to be on the way. The company filed a preliminary prospectus to sell $1 billion of securities in order to raise more money. This is a signal from the company that it will not generate positive cash flow for the foreseeable future and that it anticipates using up the existing net cash on hand of $533 million in the process.
In addition to the need for more money, the original billionaire founders have offloaded much of their stock in the company at much lower levels than the current share price. This is not a vote of confidence in the long-term business prospects for the company and contradicts the original business case they presented.
The size of the consumer market for expensive and short commercial flights into the upper atmosphere is highly uncertain. The proposed pricing of flights is out of reach for most people. In order to reach commercially sustainable operations, the volume of flights will need to be substantial thereby allowing prices to be within reach of a much larger segment of the population.
Further complicating matters is the uncertain capital intensity of the operations. As the commercial airline industry has demonstrated over time, commercial planes depreciate and require expensive outlays to maintain stable operations.
As evidenced by Blue Origin recently, competition from others entering the space will also put pressure on pricing power. The history of the commercial airline industry is not one of high margins and widescale sustainable profitability. As a result, even if Virgin Galactic reaches free cash flow someday, the valuation multiple placed on the company should be on the low-end limiting future upside potential under optimistic scenarios.
Technical resistance: $55 which is the speculative topping area from February 2021.
Technical support: $30 area which is also near the 200-day moving average. Lower levels are $23 and $15 which were tested in recent months.
Virgin Galactic Holdings 1-year daily chart
Price as of report date 6-25-21: $52
Virgin Galactic Investor Relations Website: Virgin Galactic Investor Relations