Virgin Galactic Is A Buy After 70% Stock Decline, Morgan Stanley Says In Upgrade

Shares of Virgin Galactic Holdings Inc SPCE have lost 70% since peaking in February, but the company's positive outlook remains unchanged, according to Morgan Stanley.

The Virgin Galactic Analyst

Adam Jonas upgraded Virgin Galactic from Equal-weight to Overweight with a price target lowered from $30 to $24.

The Virgin Galactic Thesis

The world has certainly changed over the past month and it is possible that demand for space tourism could fall once the coronavirus pandemic is resolved, Jonas said in a Tuesday upgrade note. (See his track record here.)

The company is backed by a "healthy" cash balance of around $500 million and is modeled to burn through $16 million in cash per month, the analyst said. The company remains in the pre-revenue stage and focused on refining its business to optimize reusability over the coming years, he said. 

Morgan Stanley's revised $24 price target is based on a sum-of-the-parts valuation model, Jonas said:

• $14 a share for space tourism.
• $10 a share for Hypersonic, based on a 25% probability.

Morgan Stanley's base case scenario also assumes 2030 revenue of $1.4 billion, or 4,000 passengers at $326,000 a ticket, and EBITDA of $690 million, or 50% margins.

Under a bear case scenario, the stock would be "effectively worth zero" if the business fails to gain traction, the analyst said.

A bull case scenario assigns  upside potential of $54 and assumes success in point-to-point hypersonic travel.

SPCE Price Action

Shares of Virgin Galactic were trading higher by 20.66% at $15.65 at the time of publication. 

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Photo courtesy of Virgin Galactic.