Virgin Galactic Holdings: Flight Delays and Major Stock Drawback

Headline:

With the news coming out of Virgin (SPCE) yesterday, we saw a massive price impact of ~-18% as Virgin was forced to end its first of three upcoming test flights. This was largely due to a lost computer connection that helps monitor the rocket motor. When this happened, the crew quickly aborted the mission and safely landed the rocket back at the Spaceport. While this definitely impacts their timeline, we believe this will just be a “speed bump” in their overall mission and therefore are still overweight the stock.

Details:

While this obviously isn’t good news, what is good is that the safety designs in place worked efficiently to avoid catastrophic consequences. While the objective of the test wasn’t met, it is good to see that the prior safety measures have not only been taken but work for their rockets. As for the objective itself, this does have significant impact to timing. While SPCE has identified the underlying problem, it is unclear how quickly they can make the adjustments and fix the issue. For that matter, it will be unclear when the next window will open for testing regardless. However, we always were of the view that any testing prior to the end of 2020 (mostly due to COVID) was ambitious to say the least. Therefore, while this has caused delays relative to the expectations set by SPCE, we believe they are still ahead of the timeline in terms of what should have been done anyway. That means that while the delay may hurt in the short term we believe the market will quickly shrug this off as they realize expectations were never “true” anyway.Additionally, SPCE’s underlying balance sheet is very strong. In the unlikely event that test flights continue to get delayed, SPCE has the financial strength to weather the storm. When analyzing their burn rate relative to their gross cash position, we are of the view that SPCE has therefore over a year or two before any real financial pressure were to form. Strength of the balance sheet is also another reason, in such a capital intensive business, that SPCE should be able to, from a financial position, continue innovating and pushing the envelope.

Conclusion:

While in the short term this has and may continue to hurt the stock, we are of the view that this has no material impact to the long term potential of the stock. We therefore remain overweight and hold at our current price target and reiterate our bull case target too of $54. Again, while the appeal of space and space tourism can cause significant volatility in both directions, we actually fundamentally believe the underlying business execution and addressable market development are solid. We therefore think this investment, given the long term nature of it, is much more suited to long term investors (think multiple years), than people looking to pull a quick profit.

Ticker: SPCE

Rating: Overweight

Price Target: $54