WSB Finimized: Can Virgin Galactic's Rocket Ship Make It To The Moon?

WSB Finimized: Can Virgin Galactic's Rocket Ship Make It To The Moon?
Stéphane Renevier, CFA

about 3 years ago4 mins

Mentioned in story

This article is the third in a series we’ll be running all week examining trade ideas posted on the WallStreetBets Reddit forum.

What’s going on?

Diving into WallStreetBets on Wednesday, it’s clear the vast majority of posts are still talking up GameStop, BlackBerry, and the community’s other favorite stocks. Here’s one that caught our eye though: Virgin Galactic (ticker: SPCE) could be “primed for a short squeeze pop,” according to user BagofBabbish. And while this post didn’t exactly make the front page, we thought it deserved more attention to see if the idea has legs. 

For those who don’t know, Virgin Galactic is an aerospace company founded by Richard Branson in 2004 that focuses on two main segments: space tourism and manufacturing of advanced air and space vehicles. The stock has already doubled so far this year and is highly popular with retail investors. So can it become the next GameStop? Let’s see how it passes our “short-squeezable” checklist of: 1) high short float and low volume, 2) existence of a bull thesis, and 3) Increasing retail interest. 

Why could it happen?

BagofBabbish’s first argument is that Virgin Galactic has a relatively high short interest: more than 50% of the shares available to trade (known as the float) are on loan to short sellers betting on a decline. We checked the numbers and it’s now more like 27% short – a fair way off GameStop’s 140% (pre-squeeze) short interest – but still significant enough to produce a meaningful rally. Traded volume in Virgin Galactic has, however, been quite large, so it should take no longer than two days for short sellers to cover their positions by buying up the stock if they find themselves on the losing side of the trade. So, in terms of technicals, the stock is no GameStop but remains an interesting candidate for a short squeeze. 

There are also fundamental reasons supporting a bullish stance. The first one pointed out by user iannoyubadly is that commercial space travel is getting legitimized. And Virgin Galactic is one of the only players in an industry that, according to UBS, could be worth more than $30 billion by 2030. But, to me, the most attractive business segment is not space tourism but hypersonic commercial travel – which could completely revolutionize the way we travel across the globe in the future. Morgan Stanley estimates that this less known market could be worth $800 billion in annual sales by 2040. 

The last factor – increasing retail interest – still has room to grow. Space travel is an exciting industry, Branson is a charismatic leader, and the chairman of the board is none other than Chamath Palihapitiya, one of WallStreetBets’ champions. There are also two catalysts that could make Virgin Galactic hit the headlines in the near future: Branson is planning to resume test flights of its rocket-powered spaceplane, and asset manager ARK Invest plans to launch a “Space Exploration ETF”, which would most likely include Virgin Galactic. 

Where could it go wrong?

The stock is highly speculative and the complexity and early stage of the industry make it almost impossible to value the business. Any bad news from an operational or regulatory standpoint could instantly halve the stock price. This company has almost no revenue, let alone profits, so buying its shares is purely a bet on future growth. While that comes with high potential rewards, it also comes with high risks. 

From a more technical standpoint, the stock has already experienced huge gains and has more recently moved in lockstep with other highly shorted stocks, suggesting it has benefited from the Reddit frenzy. Should the short-squeeze crowd lose some of its influence, the stock could correct in the short-term. Employees and directors have also been selling the stock recently, and such “insider selling” is often a sign a rally may have gotten ahead of itself. 

Over the medium term, there’s another risk to highlight: the risk of dilution. Because it went public via a special purpose acquisition company (SPAC), it’s likely the SPAC sponsor received a chunk of warrants over the shares almost for free. If or when exercised, these warrants would dilute the ownership of other shareholders. Added to that, the company could take advantage of the high stock price to issue new shares – which would again dilute existing shareholders. In fact, that’s the reason why Morgan Stanley, an early bull on the stock, now values the shares at $22, less than half of where it’s trading now.

So what’s my take on it? I think these Reddit users raise some interesting points and the stock could indeed be a good candidate for a short squeeze should the retail community shift its full attention to it. That said, what’s more interesting, in my view, is the long-term potential for the stock – and if you believe in Virgin Galactic’s future you could consider buying any  significant dip in the share price. With the company reporting earnings on February 25th and the Reddit community losing some of its influence, that opportunity might appear sooner rather than later.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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