SPCE +1.25 to 8.51
fly -
Shares of Virgin Galactic (SPCE) surged on Monday after a Morgan Stanley analyst recommended investors buy share, as the firm sees the greatest value potentially coming from hypersonic travel more than leisure space travel.
BUY FOR THE HYPERSONIC OPPORTUNITY: Morgan Stanley analyst Adam Jonas initiated coverage of Virgin Galactic with an Overweight rating and $22 price target, telling investors in a research note that he sees a "biotech-type risk/reward" for the shares. He believes the addressable market for space tourism is niche, but supported by a range of industries.
However, Jonas believes what is really likely to drive upside for the stock is what he calls "the third phase of the VG business model," namely hypersonic point-to-point, or P2P, air travel. "A viable space tourism business is what you pay for today... but a chance to disrupt the multi-trillion-dollar airline [total addressable market] is what is really likely to drive the upside," Jonas wrote. He added that “the shares feature biotech-type risk/reward where today’s space tourism business serves as a funding strategy and innovation catalyst to incubate enabling tech for the hypersonic P2P air travel opportunity."
WHAT'S NOTABLE: The analyst's $22 price target factors in $10 per share in value for space tourism and $12 per share for the hypersonic opportunity that are part of the company's three-phase plan outlined during its roadshow earlier this year, he said. He forecast $800B in annual sales for hypersonic travel by 2040.
"While some investors have described high-speed hypersonic P2P air travel opportunity as ‘the icing on the cake’, we see Hypersonic as both the cake and the icing, with Space Tourism as the oven," Jonas said.
FIRST SPACE TOURIST FLIGHT NEXT YEAR: Virgin Galactic expects to begin flying its first space tourism customers in the next six to nine months. Morgan Stanley estimates Virgin Galactic can ramp its flight offerings to serve more than 3,000 passengers by 2030, as Jonas says “the addressable market for space tourism, while niche, is supported by a range of industries, including yacht charters and luxury cars." “Space Tourism’s goal over the next year: be safe, stay funded,” he wrote. “We believe the key catalyst over the next 12 months will be sending even one customer to space and returning safely.”
While Jonas acknowledged that there are many risks and unknowns to the story, including the possibility of fatal accidents, regulatory obstacles, limited market acceptance, competition, insufficient economics, and liquidity constraints, "taken together, we think the risks are offset by the potential scale of the reward," he wrote in his note to investors beginning coverage of the stock.
PRICE ACTION: In afternoon trading, shares of Virgin Galactic are up over 15% to $8.38.
