SPCE

Why Virgin Galactic Stock Just Crashed 16.5%

Virgin Galactic (NYSE: SPCE) stock tumbled 16.5% through 10:40 a.m. ET Friday morning on what should have been ho-hum news. This morning, the company filed its regularly scheduled "notice of annual meeting of stockholders" (to be held on June 12). On the agenda: electing directors, approving an auditor, and setting executive salaries.

Oh, and one more thing.

Virgin Galactic will propose a reverse stock split.

What will a reverse split do?

As the name suggests, a reverse stock split is the opposite of an ordinary stock split. Instead of giving you more shares, it leaves you with fewer. Virgin Galactic will propose anywhere from a 2-for-1 to a 20-for-1 stock split. Thus, if you own 1,000 shares of Virgin Galactic stock today, you might end up with as few as 50 once the reverse split takes effect.

Investors are upset at this prospect -- even though it won't affect the actual value of an investment in Virgin Galactic. Whether you own 1,000 shares of stock worth $1 each or 50 shares of stock worth $20 each, you own $1,000 worth of stock. (Unless, of course, the stock price falls 16.5% on the announcement, as it just did.)

Why a reverse split? And why now?

So why did Virgin Galactic take this risk? Basically, because its stock has been trading below $1 per share for the last three days. NYSE rules generally require that stocks maintain an average closing price of $1 per share or risk being delisted.

So Virgin Galactic is getting ahead of this problem by ensuring its stock won't be flirting with the $1 delisting threshold off and on for days, weeks, or months on end. A reverse split will raise the value of each share to somewhere from $2 to $20.

Crazy as it may sound to investors upset by the stock price decline today, this is actually a smart move on management's part.

Should you invest $1,000 in Virgin Galactic right now?

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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.

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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