Space tourism pioneer Virgin Galactic picked up a new Wall Street rating, a tepid Hold from Bernstein analyst Douglas Harned. He thinks traveling many times the speed of sound is cool, but wonders if its a fad. And he a unique risk for the company.
Harned‘s price target for Virgin Galactic (ticker: SPCE) stock is $27, right about where shares are trading. At noon Tuesday, shares were up about 0.7% to $26.93. The S&P 500, for comparison, is up about 0.1%.
The analyst does like the company’s business model and believes Galactic’s economics look “highly attractive” once the company initiates commercial service. But Harned has his doubts about what the business will look like longer term. He models $1.8 billion in sales and $878 million in free cash flow in 2030. That’s impressive, but “valuation is complicated by long-term uncertainty,” wrote Harned. He just isn’t certain how attractive the service will be, or if pricing will hold up, after 2030.
And valuation is complicated by a risk that looks unique to Galactic. Harned thinks the risk of an accident is far higher for Virgin Galactic than other entertainment businesses. “A catastrophic failure by any provider could have a crushing effect on demand for all,” the analyst pointed out in his Tuesday report. “We expect risk per flight to be low. But, as activity ramps, chances of an accident would increase. Risk needs to be considered in discount rates for valuation.”
Discount rates means Harned wants to earn a higher-than-average return for the stock, which means investors have to pay less today to account for the unique risk.
The new investment take isn’t great news for Galactic investors, who have had it tough lately. Analyst sentiment, for starters, is slipping.
Overall, 10 analysts cover the stock. Four rate it Buy and six rate it Hold. The 40% Buy-rating ratio is below the roughly 60% average for stocks in Dow Jones Industrial Average.
What’s more, six months ago, eight out of eight analysts covering the stock rated shares Buy. Shares were roughly $22 back then, so a $4 rise in the stock has left the Street lukewarm on shares.
But the path of shares took over the past six months seems to have affected analyst sentiment. Shares hit more than $60 before dropping by more than half. Now the average analyst price target is roughly $37, about 40% above where shares trade. Still, there haven’t been many upgrades of Galactic shares lately.
If the company successfully launches commercial operations in 2021, sentiment might start to shift.
