Virgin Galactic Earnings Highlight Potential and Shortcomings

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By most accounts, the earnings report from Virgin Galactic (NYSE:SPCE) was pretty encouraging. While SPCE stock fell 7.5% in after-hours trading, keep in mind that the stock rallied 7% on the day ahead of the report. 

Virgin Galactic (<a href=SPCE) banner hanging on the New York Stock Exchange building to celebrate its IPO." width="300" height="169">

Source: Christopher Penler / Shutterstock.com

At this stage of the game, we all know that Virgin Galactic isn’t an earnings story. Heck, it’s not even a revenue story. The company is making progress on space travel and high-speed aviation solutions. That doesn’t equate to “right-now” revenue, and as a result, it doesn’t make its earnings reports all that relevant. 

On the flip side, it does offer investors an opportunity to hear from management and see the company’s progress. 

Encouraging News in the Quarter

Some of the most encouraging news actually came out before the earnings release. A few days after unveiling what the cockpit would look like on its $250,000 space flight, Virgin also had positive news on the day it reported.

The company unveiled its design for a high-speed aircraft and signed a non-binding memorandum of understanding with Rolls-Royce for designing and developing an engine propulsion system. 

As it stands, the plan calls for an aircraft that would fly at Mach 3 speed above 60,000 feet. It would carry 19 to 29 people, although it’s not clear how economical this solution would be. Still, for some consumers, rapid air travel would be a value for those who can afford it.

In any regard, what about this quarter? 

A second-quarter loss of 30 cents per share missed estimates by 3 cents, losing about $63 million for the quarter. While the company has recorded slight revenue figures in the past (including in Q2 2019 and Q1 2020), Virgin Galactic recorded no sales this quarter. 

As I pointed out on Twitter, some of the positives include

  • “Cleared three new FAA Verification and Validation elements, bringing the total number of elements cleared to date to 27 out of 29.”
  • “Entered into Space Act Agreement with NASA to facilitate the development of high speed technologies.”
  • “Over 700 deposit payments received.”

Further, SPCE stock still holds $360 million in cash. That’s plenty of cash on hand, even though the company continues to burn cash under current operations. The tough thing here is that, even though Virgin clearly has enthusiastic customers, we need sales to really get some sustainable momentum going. 

Without any business, it’s hard to value a business entity. For as much as I like this stock, this much is true. 

Trading SPCE Stock

Daily chart of SPCE stock after earnings.
Click to Enlarge

Source: Chart courtesy of StockCharts.com

One could argue that, given our current environment with the novel coronavirus, companies that don’t do a lot of business are not worthy investments. That has some merit, even though the S&P 500 has soared 50% from the lows and the Nasdaq has hit new highs. 

There’s no guarantee these robust gains will hold up or that equities will continue to climb. If the market comes under severe selling pressure, what will be there to support SPCE stock? 

It won’t be the low valuation, strong earnings, solid free cash flow or attractive dividend payout. Instead, its stock will likely tumble into free-fall, much like it did earlier this year. Granted, shares were going parabolic in February, but amid the coronavirus selloff, SPCE stock suffered a peak-to-trough decline of 78.6%. 

I stand by my previous observation that Virgin Galactic is an excellent speculative holding. It’s not the fundamental stud that some investors seek out, but it’s also got a ton of potential. Case in point, shares are up more than 40% since we last took a look at this name.

Q2 earnings have the potential to accelerate or reverse the current trend. Most recently, that trend has been to the upside. 

On the downside, I want to see the $20 to $21 area hold as support, along with the 20-day moving average. With a negative post-earnings reaction, this area could be in play sooner than expected. If it holds, bulls remain in control and the risk remains to the upside. Below this area and the risk shifts to the downside, putting the 50-day moving average in play in the mid-$18s. 

On the upside, let’s see if SPCE stock can clear $26. Above puts $28-plus in play. 

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. Kenwell is long SPCE.

The post Virgin Galactic Earnings Highlight Potential and Shortcomings appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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