As the first publicly traded space tourism company, Virgin Galactic (NYSE:SPCE), gets considerable investor attention. So far in 2020, SPCE stock is up 45%.
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Amid the headlines of a second wave of the COVID-19 pandemic, volatility has recently returned to broader markets. And for some market participants, space exploration and tourism probably feel like a pipe dream given our daily lives are still rather restricted. But NASA announced in late May that “NASA astronauts, for the first time ever, launched from U.S. soil in a commercially built and operated U.S. crew spacecraft on its way to the International Space Station.”
The spacecraft in question belonged to SpaceX, another space-exploration company privately owned by Mr. Elon Musk, CEO of Tesla (NASDAQ:TSLA). Despite the justified excitement this launch caused, “space” as an investment theme is still in its infancy. Let’s take a closer look at Virgin Galactic to see if SPCE stock should belong in a longer-term portfolio.
How Virgin Galactic Went Public
Virgin Galactic is part of Sir Richard Branson’s Virgin Group. He had previously founded Virgin Atlantic Airways which itself is owned in part by Delta Air Lines (NYSE:DAL). Virgin Galactic defines itself as “the world’s first commercial spaceline and vertically integrated aerospace company.”
The company went public on Oct. 28, 2019, via a reverse merger with a special-purpose acquisition company (SPAC). InvestorPlace readers may remember that DraftKings (NASDAQ:DKNG) and Nikola Motor Co. (NASDAQ:NKLA) have also gone public through such a transaction. SPACs have become an alternative method of going public instead of the traditional IPO route.
In a recently submitted dissertation research at the Department of Finance, Texas Christian University, James Griffin highlights:
“a SPAC is a form of capital-raising in which an entity raises public funds for the sole purpose of acquiring a private company… SPACs are not operating companies… The SPAC raises money through a traditional initial public offering, conducts a target company selection process, proposes an acquisition to its shareholder base, then acquires the company if its shareholders approve of the choice. Most SPACs begin trading at a price in the ballpark of $8-10 per share.”
Virgin Galactic’s SPAC partner was Social Capital Hedosophia (SCH) founded by venture capitalist Chamath Palihapitiya a as a special-purpose acquisition company (SPAC). SCH was first listed in September 2017 with an opening share price of $10.
Following various SEC registrations as part of the reverse merger, SPCE stock started trading on Oct. 28, 2019, at an opening price of $12.34. On Feb. 20, they hit an all-time high $42.49. On March 18, they saw a recent low of $9.06. Now, shares change hands around $16.
SPCE Stock Price Is Likely to Stay Range-Bound
Despite its initial run-up in price in 2020 to go over $40, over the past several weeks, SPCE stock has been hovering around its opening price.
In a recent article published in SeekingAlpha, Edward Vranic, CFA, suggested that the rapid declines folowing all-time highs are due to the mechanics of going public via SPACs. In most cases, only a small portion, i.e. typically less than 10%, of shares are held by the public. The rest are held by other private individuals or entities, including “Private Investment in Public Equity” (PIPE) investors. In most cases, such PIPE investors own each share at around a price of $10.
Depending on the initial IPO terms, those shares held by PIPE investors usually need to be registered within a certain number of months. Then, there are likely to be warrants that get redeemed as a new stock like SPCE becomes hot, goes over a certain price level.
Therefore, as SPCE stock was aiming for the skies earlier in the year, a wide range of investors would have likely started cashing in on their investment. A March 13 press release by the company clearly announces such a redemption of public warrants. Coupled with the market crash in March, it would not be difficult to see why the shares would now be around hovering around their initial trading price.
For SPCE stock to make a sustained rally form these levels, its next earnings call on August 3 will be very important. The Street would like to see focus on future bookings and space flight details. If management can deliver, then investors may become excited once again. Otherwise, they are likely to keep the share in a range, possibly between $12.50 and $17.50.
The Bottom Line on SPCE Stock
Within this new decade, space tourism could become a market of $3 billion. And by default, the prospects for SPCE stock could be risky, yet exciting and rewarding.
However, Virgin Galactic is a new venture with little revenue. Yet investors with a long-term horizon whose portfolios can also weather further volatility may consider buying into the shares of this exciting venture.
Are you currently an investor in SPCE stock? Then you may also consider initiating an ATM covered call position. For example, an August 21 expiry-covered call would decrease the volatility in your portfolio and offer some downside protection.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.
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