2023-05-08 14:34:03 ET
Summary
- Speculative space-related equities have endured steep losses this year as investors embrace high-quality and companies with strong free cash flow.
- Despite ongoing profitability challenges, I'm upgrading SPCE to a hold before earnings Tuesday night.
- Positive flight news today and some emerging reversal signs on the chart make me less bearish despite a poor earnings-reaction history.
Space stocks continue to be sour as investors prefer owning high-quality equities with solid free cash flow. While Virgin Gala ctic ( SPCE ) ha s major negative FCF, I see some positive catalysts. And after a major share price slide in the last year, a lot of the bad news may be baked in.
I am upgrading SPCE to just a hold for now ahead of earnings Tuesday. But with extremely high short interest and extreme implied volatility, it would be prudent to keep position sizes small.
Space Stocks Suffer In 2023
According to Bank of America Global Research, SPCE designs and manufactures spacecraft and carrier aircraft intended for commercial space tourism. The company is not yet profitable and commercial operations are expected to begin in 2Q23. The stock has a very high 24.5% short interest, so any decent new inklings could send SPCE rocketing up.
The California-based $1.0 billion market cap Aerospace & Defense industry company within the Industrial sector has negative trailing 12-month GAAP earnings and does not pay a dividend, according to The Wall Street Journal.
The bulls hope that the company will one day turn into a cash flow machine as a leading commercial spacecraft transporter. And good news came on Monday when Virgin Galactic said it would begin commercial flights next month. But that was also the expectation – the company had already completed much of its work on the VMS Eve mothership to support Spaceport America. Reading between the lines, the news today could portend positive numbers in tomorrow’s earnings report (that is just my speculation based on the corporate body language here).
Challenges remain despite a four-member test flight that is slated to occur this month. The next step after the June launch is for commercial operations to begin. I see prospects for growth, but question marks remain – a higher-cost of-capital environment and a weakening macro backdrop are significant headwinds.
On valuation , analysts at BofA continue to expect sharply negative per-share profits. EPS should improve through 2025, but no profitability is expected any time soon – and the Bloomberg consensus outlook backs that up (though it is less negative). The stock has been hammered in the last year-plus as investors demand companies post positive free cash flow. SPCE has steeply negative FCF and will likely continue to burn through cash in the coming quarters.
Along with no earnings and terrible FCF trends, the firm has little in the way of sales. Even using forward numbers, the price-to-sales ratio is a whopping 87. Still, today’s news helps bring about some confidence that the trajectory toward growth and earnings is happening.
Virgin Galactic: Earnings, Valuation, Free Cash Flow Forecasts
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q1 2023 earnings date of Tuesday, May 9, after the closing bell with a conference call immediately after results hit the tape. You can listen live here . The company also holds its annual shareholder meeting (virtual) on Thursday, May 9.
Corporate Event Risk Calendar
The Options Angle
Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of -$0.52 which would be a large decline from -$0.36 of per-share losses earned in the same quarter a year ago. Something I find bearish is that the company has missed on EPS estimates in the last four quarters and has only topped expectations in two of the previous 12 reports. Moreover, shares are lower post-earnings in three of the last four quarters.
This time around, the options market has priced in a high 12.7% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after Tuesday's Q1 report. The stock has a history of being volatile – the typical move after reporting is more than 12% when averaging out the last four events. As such, I would actually lean long options at that price considering additional headline risk right now.
SPCE: Another Quarterly Loss Expected, Major Volatility Through Earnings
The Technical Take
With a much lower stock price and a hope that profitability is less distant, I see some positive signs on the chart. Notice in the graph below that shares have a bullish RSI momentum divergence on the weekly view when comparing RSI with price. SPCE notched a fresh all-time low in April around the Virgin Orbit bankruptcy filing, and that may have been the bearish catalyst needed to shake out the remaining bulls.
I also spotted a modest volume jump during a near-term low late last year – January volume on the move higher was respectable. Still, there’s resistance around $4.50 where overhead supply comes into the picture from the Q1 range. Additionally, the 40-week moving average (which is essentially the same thing as the 200-day moving average) is downward sloping, indicating the bears still have a stronghold on this space stock. The technicals appear better today as the downtrend eases, though.
SPCE: Bullish RSI Momentum Divergence, Resistance Mid-$4s
The Bottom Line
I am upgrading SPCE to a hold with the positive news today ahead of earnings Tuesday. A big stock price move is priced in, and I see early signs of a bottom forming on the chart.
For further details see:
Virgin Galactic: Upbeat Flight News, High Volatility Into Earnings, Upgrading To Hold