Virgin Galactic (NYSE: SPCE) and its share price have been garnering headlines recently. It successfully completed its first manned test flight with company founder Sir Richard Branson on board. Seeing this technological progress being made is indeed inspiring to me.
But it seems not all investors share my enthusiasm as the stock has taken a nosedive this week. In fact, since Monday, the Virgin Galactic share price is down over 30%. While its 12-month performance is still up around 80%, the question remains – what’s causing this downward momentum? And is this a buying opportunity for my portfolio?
The crashing Virgin Galactic share price
The successful flight marks a massive milestone that the business has been working towards for 17 years. Yet despite this success, the stock is seeing an enormous level of selling pressure. And it’s actually quite understandable. Why? Because the company has since filed with the Securities Exchange Commission to sell up to $500m in common stock. It’s issuing new shares to raise additional capital for its next stage of commercial development. But, as a side effect, the Virgin Galactic share price is suffering from dilution.
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Approximately 10.2 million shares are being offered. Comparing that to the existing 240 million shares outstanding indicates a dilution effect of around 5%. That’s certainly nowhere near as large as the 30% drop in price. But it’s worth noting that Virgin Galactic’s share count has increased by over 170% since 2018.
Given that the business remains pre-revenue, beyond the 600 pre-booked tickets sold, I don’t think the need to raise additional capital will disappear any time soon. In fact, I wouldn’t be surprised to see more shares issued in the future. Maybe that’s why selling pressure has been so high lately.
Time to buy?
Seeing a rise in the number of shares outstanding isn’t much fun for existing investors. But dilution effects are ultimately a short-term problem. Meanwhile, Virgin Galactic is receiving a significant surge of capital that can be reinvested in expanding its operations. The management team has forecast that the business will generate approximately $1bn of revenue a year per spaceport once in a commercial state. Assuming this target is reached, today’s $8bn valuation seems far more reasonable.
However, it could be several years before that becomes a reality. Meanwhile, other competing companies like Jeff Bezos’ Blue Origin and Elon Musk’s SpaceX are fighting for the same niche market of customers who can afford a $250,000 ticket. I feel this is important to highlight because all it takes is one fatal accident for the reputation of any of these businesses to be severely tarnished. If such a tragedy were to occur, it wouldn’t be difficult for competitors to quickly snatch up market share.
All things considered, I believe the Virgin Galactic share price has the capability of exploding over the long term. Having said that, there remain a large number of unknowns at this stage. And with its valuation seemingly being primarily driven by speculation, I’m keeping this business on my watchlist for now.
