Investing in space is a difficult task when you think about it. It’s not just that getting off the ground, into the stratosphere and into orbit is so costly, but very few companies have the bulk of their operations tied to activities in space. Most are conglomerated in aerospace, defense and technologies. Virgin Galactic Holdings Inc. (NYSE: SPCE) is an exception to that rule.
Virgin Galactic is considered to be a vertically integrated commercial spaceflight company that designs and will operate its own space vehicles. According to Credit Suisse, investors should expect 35% upside by putting their investment dollars into this company.
Credit Suisse’s Robert Spingarn and Scott Deuschle issued a new Outperform rating on Thursday, and its odd price target of $12.43 offers roughly 35% upside from its $9.20 share price. The firm’s bullish view on Virgin Galactic is said to reflect the company’s near-term monopoly in commercial space tourism, where other public investment opportunities are scarce. The analysts view Richard Branson’s company as a classic technology-driven high-demand and low-supply investment in which there are significant barriers to entry from other competitors.
While this comes with upside projections of 35% or so, Credit Suisse does note that its shares are likely to be range-bound until the successful completion of its first commercial flight, which is scheduled for the summer of 2020.
24/7 Wall St. would like to remind its readers that investors should never use any single analyst or research report as the sole basis for making an investment or trading decision. The traditional analyst upside target for established Dow Jones industrials or S&P 500 companies comes with projected upside averaging 8% to 10% at this stage of the bull market. The higher the upside projection is (35% in this case), the higher the risk.
The Credit Suisse report said:
Further, the separate, but equally important, scarcity of commercial space tourism offerings enables sticky pricing with low relative operating costs, especially now that much of the infrastructure is bought and paid for. With no near-term competition, growth should be fueled by expanding supply (via future ships in Phase 1 and additional space ports and ships in Phase 2) … National interests should also drive host countries to assume development costs for Phase 2 spaceports, mitigating longer-term investment requirements for Virgin Galactic.
Credit Suisse is modeling Phase 1 peak EBITDA margins of 48.1% for 2024, though its Phase 2 margin estimate goes down to 42.1% in 2029 as expanding supply and potential competition should bring some price compression. The firm’s view is that absolute EBITDA should continue to grow and the total addressable market and demand should meet or exceed the supply of Phase 2, even if the company splits the market with the competition.
Credit Suisse’s 2024 EBITDA estimate is $278 million, with a 2024 net cash balance of $643 million and an implied market capitalization of $3.9 billion. One model comes up with an implied share price of $15.06 (with a target price contribution of $7.15) and another model drives an implied share price of $11.12 per share ($5.28 on a weighted basis). Marrying those two and assigning a $0 value in the case of a catastrophic event (such as a fatal crash) generates that unusual $12.43 target price.
Credit Suisse did acknowledge some significant risks for the space tourism pioneer. Virgin Galactic is in an unprecedented and largely untested business model. The firm noted that lower-than-expected demand could come up, although it has roughly 600 deposits and another 3,557 indications of interest. Another issue would be schedule slippage where Phase 1 or Phase 2 schedules could affect projections, and it’s possible that flight costs could be higher than expected. Of course the one risk no one hopes to ever see would be from an operational accident or malfunction.
Virgin Galactic shares were last seen up about 1% at $9.20, and the 52-week trading range of $8.56 to $12.09 is actually a post-SPAC range since October 28, 2019. The stock opened at $23.04 and closed at $10.99 on its first day of trading, which was also the day of its high. It took only two more trading days before it closed under $10, and it has closed above $10 on only two different trading days so far in November.
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