Analysis

Virgin Galactic Stock Has 25% Downside Risk, According to 1 Wall Street Analyst Firm

Why would you invest in a spaceplane stock that has no actual spaceplanes to fly?

Space roller-coaster stock Virgin Galactic (SPCE 3.50%) took investors on a wild ride this week, soaring 10% Monday on news of progress building its Delta-class spaceplane, then tumbling 7% early Wednesday after reporting how much money its current Unity-class spaceplane is losing — only to land right near where it began the week, around $1 a share.

But I think investors are overestimating Virgin Galactic’s chances of success. This business isn’t stable at all, warned Wells Fargo in a StreetInsider note Thursday. In fact, Virgin Galactic stock may fall as low as $0.75 per share, according to the note.

Is Virgin Galactic stock a sell?

Good news first: Virgin Galactic beat on both sales and earnings in Q1. True, sales were only $2 million for this space stock that is valued in excess of $400 million. Also true, Virgin Galactic lost $0.25 per share in the quarter. Still, investors feared even worse news, and a beat is a beat.

But it’s still not enough to make the stock a buy.

Wells complains it sees no near term “positive catalysts” for Virgin Galactic, seeing as its last Unity flight will take place next month, the company won’t have new spaceplanes available until 2026 at the earliest, and it’s still burning cash. But it’s actually the banker’s long-term comments that worry me more.

Virgin Galactic has proven it cannot earn a profit flying passengers for less than $250,000 a ticket. As Wells points out in its underperform, i.e., sell, report, Virgin Galactic hopes to build two Delta spaceplanes by 2026, and use them to work through its backlog of 600 tickets sold for $250,000 and under by 2027. But that’s at least 300 passengers flying per year.

Over the past year, Virgin Galactic has succeeded in flying only 24 passengers.

Growing that number 12.5x in two years, using spaceplanes that don’t exist yet, simply isn’t realistic. Virgin Galactic is a penny stock today, and Wells is right to call it a sell.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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