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Are Shares of Virgin Galactic a Buy Under $20?

Virgin Galactic (SPCE) stole the headlines after completing a crewed spaceflight to the edge of space in July. Nevertheless, the company's shares have declined 20% in price over the past month because SPCE is struggling amid the rising competition in the industry. So, given SPCE's poor fundamentals and lofty valuation, is it worth betting on the stock at its current price level? Let's discuss.

Virgin Galactic Holdings, Inc. (SPCE) is an integrated aerospace company that focuses on spaceships and related technology for tourists and researchers. The Las Cruces, New Mexico-based company, rose to prominence after founder Richard Branson and a crew of five people flew to the edge of space on July 11 aboard SPCE's rocket plane.

However, despite the company's long-awaited accomplishment, SPCE’s share price has declined 55% over the past six months and 20% over the past month, closing yesterday's trading session at $15.62.

In addition, SPCE is currently trading at a premium valuation considering its poor growth prospects. In terms of its forward EV/Sales, the stock is currently trading at 822.41x, which is 41465.2% higher than the 1.98x industry average. Furthermore, SPCE's 1177.56x forward Price/Sales is 71140% higher than the 1.65x industry average. This, along with SPCE's weak profitability, could cause the stock to suffer further price declines in the near term.

Here is what could shape SPCE's performance in the near term:


In August, Lifshitz Law Firm, P.C. filed a class-action lawsuit against SPCE, alleging that the company has made false and misleading claims and failed  to disclose relevant information. The complaint alleges that SPCE lacked adequate disclosure controls and processes and internal financial reporting controls. Also, the company erroneously accounted for SCH warrants that were outstanding at the time of the business combination.

Inadequate Financials

SPCE's operating loss increased 7.9% year-over-year to $83.08 million for the third quarter, ended September 30, 2021. Its net loss came in at $48.37 million, while its EPS amounted to $0.32. The company's net cash used in operating activities grew 1.6% from the prior-year quarter to $165.64 million, while its adjusted EBITDA came in at negative $68 million at the end of the quarter.

Weak Profitability

SPCE's 0% trailing-12-months asset turnover ratio  compares with the 0.79% industry average. Also, its ROC and ROA are negative 22.4% and 33.7%, respectively. Furthermore, its trailing-12-months cash from operations stood at negative $235.73 million compared to the $223.70 million industry average.

Poor Growth Prospects

Analysts expect SPCE's EPS to decline 25.6% in the current year and 9.7% in the current quarter. Also, the company's EPS is expected to remain negative in the current year and next year. Also, the company failed to beat the Street’s EPS estimates in all four trailing quarters. In addition, SPCE's EPS is expected to decline at a 60.6% rate per annum over the next five years.

POWR Ratings Reflect Uncertainty

SPCE has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SPCE has an F grade for Quality. The company's poor profitability is in sync with the Quality grade. In addition, the stock  has a D for Growth, which is justified given its poor growth prospects.

Of the 30 stocks in the F-rated Airlines industry, SPCE is ranked last.

Beyond what I have stated above, one  can view SPCE ratings for Stability, Value, Momentum, and Sentiment here.

Bottom Line

SPCE has made solid progress on the operational front, focusing on the development of potential space vehicles and the completion of its first fully crewed spaceflight. However, the company's progress has yet to be reflected in its financial statements. Furthermore, with rising competition in the space business (Jeff Bezos's Blue Origin and Elon Musk's SpaceX have made substantial headway recently), SPCE's first-mover advantage may be squandered if it fails to fix its operational inefficiencies. So, given the uncertainties related to the company's prospects, we believe the stock is best avoided now.

How Does Virgin Galactic Holdings Ltd. (SPCE) Stack Up Against its Peers?

While SPCE has an overall F rating, one might want to consider its industry peer, SkyWest Inc. (SKYW) and Mesa Air Group Inc. (MESA), having an overall B (Buy) rating.

Note that MESA is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.

SPCE shares rose $0.06 (+0.38%) in premarket trading Wednesday. Year-to-date, SPCE has declined -34.22%, versus a 26.63% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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