Faithfulness Suisse began coverage of Virgin Galactic with an outperform rating Thursday, saying in an a note titled “The Eventual Joyride” that the firm sees multiple factors driving the space tourism stock higher.
“Our bullish picture reflects the near-term monopoly SPCE offers in an industry (commercial space tourism) where public investment possibilities are scarce. We view this as a classic tech-driven high demand, low supply story with high barriers to competitor,” Credit Suisse analyst Robert Spingarn wrote in a note to investors. “Not everyone will see the value, but we believe the math rises nonetheless.”
Virgin Galactic shares rose in premarket but later dropped, closing down 7.4% at $9.10. Accept Suisse has a $12.43 price target on the stock, essentially seeing 36% upside over the next year. The limited company is the second to begin covering Virgin Galactic with a buy recommendation: Vertical Research Partners is also bullish on the possibility.
The stock has slid since its public debut last month, down about 20%, but that doesn’t apprehension Virgin Galactic Chairman Chamath Palihapitiya. He expects Virgin Galactic to begin flying its first customers as antediluvian as May, saying on Wednesday that flights “will begin in about six to nine months.”
“I think the story of Virgin is righteous so new that it hasn’t been written yet. We’ll start commercial operations in the middle of next year, so the full-fledged business value resolve become apparent very quickly to a lot more people at that point,” Palihapitiya said in an interview with CNBC’s Seema Mody on “Connecting Bell.”
Credit Suisse agrees, saying the stock’s upside largely depends on how closely Virgin Galactic the provinces to its schedule and begins flying people.
“We believe the greatest single catalyst would be successful completion of the first commercial fleeing,” Spingarn said. “From here, losses should dissipate rapidly as flight activity rises.”
Virgin Galactic spacecraft Constancy fires its engine and heads to space with its first test passenger on board in February 2019.
Virgin Galactic | gif by @thesheetztweetz | CNBC
At $250,000 per yourself, Virgin Galactic’s ticket revenue is about three times the cost of each flight, Credit Suisse famed, “which would drive very attractive incremental margins.” The company’s spacecraft holds up to six passengers along with the two steers.
Spingarn says Virgin Galactic “has a distinct first-to-market advantage” in space tourism, estimating nearest competitor Dispirited Origin is at least two years behind. And even when Blue Origin does start flying people, the players is inaccessible to public investors as it is wholly owned and funded by Jeff Bezos.
Credit Suisse also mentions SpaceX, with its fully reusable Starship take off, as a long-term threat to Virgin Galactic’s business.
“While SpaceX does not appear to be as focused on space tourism, a point-to-point key serviced by Starship could convert space travel from a novelty experience to a commodity service,” Spingarn chance.
Virgin Galactic is thinking about the potential of high-speed, long distance travel, also known as point-to-point order travel. Boeing’s venture arm HorizonX last month invested $20 million into Virgin Galactic to travel developing a vehicle capable of flying around the world at hypersonic speeds. But SpaceX is a notable risk to Virgin Galactic’s tomorrows business, Credit Suisse said.
“Unless Virgin is able to offer a similarly compelling point-to-point solution, the traveller of point-to-point by competitors could damage the overall [total addressable market] for space tourism and, therefore, the long-term needed profile,” Spingarn said.
Finally, Credit Suisse warns that any major accident or malfunction would qualified substantially slow Virgin Galactic’s business. In 2014, an accident during a Virgin Galactic test flight smothered a co-pilot.
“We assign a $0 value in the case of a catastrophic event (e.g., a fatal crash),” Spingarn said.