The Uncomfortable Risk of a Space Tourism Company
The first stock rating on Virgin Galactic (SPCE, SPCEWS) is out. Analyst Darryl Genovesi of Vertical Research says the stock fell, and is being held down by fear of a mishap in space. Mr. Genovesi disagrees with the market’s angst, and has put a $20 price target on the stock.
Addressing Risk
In the mid-2000’s I had the opportunity to consult for NASA’s unmanned launch program based at Kennedy Space Center. LSP, or the Launch Services Program, was looking at ways to make launching satellites cheaper.
In between calling every potential space company in the U.S., I was talking to one of the NASA engineers about new launch vehicles. The subject of risk came up.
Just as it’s apparently at the forefront of investor’s minds with Virgin Galactic, it is always a top priority at NASA.
My NASA friend’s take on risk may help you if you’re thinking of investing in Virgin Galactic, but fear of a mishap is holding you back.
The thinking is that first flights are often less risky than subsequent flights. Here’s the reasoning…
For the first launch you’ve done all of your testing (which Virgin Galactic definitely has), you’ve got your A team in place, and everyone is on top of their game.
With everyone concentrating on getting it right, and with the world watching, your chances of a mishap on the early launches is actually very low.
Now, while those chances will remain very low, in the subsequent launches some things have changed.
The people that got the program off the ground (pun intended), or the original engineers, scientists, etc. tend to move on. Maybe poached by companies like Blue Origin.
The result is new people who can’t know every detail of what went before. And with the loss of institutional knowledge risk increases.
It’s a common phenomenon in the corporate world. But, in most cases people don’t die when institutional knowledge is lost.
Mr. Genovesi at Vertical Research, makes a comparison of Virgin Galactic’s program to the X-15 program, which he states only crashed once in 199 tries. And, as he says, that was many years ago and the tech and safety measures are much better today.
Space is Hard
So…now let’s address the uncomfortable elephant in the room.
Going to space is hard. People have died trying, and will die trying in the future.
The question here is do you invest in a company with a high probability that at some point a very small percentage of it’s paying customers will be killed while using the company’s services.
To other companies this happens every day (automobile companies) or each year (airplane companies). But, the difference here is the service is brand new.
As far as the company and its prospects go, if one accident happens 500 trips in that’s one story. If it happens on the first, second or third trip, that’s a completely different story.
Ironically, if you believe NASA engineers, the likelihood of that accident happening early is less than it happening later.
Worth the Risk
Personally, I’m with Mr. Genovesi here. I believe the play is to be in the stock (or, you know my preference, the warrants) and bet on a very successful first (and hopefully EVERY) launch.
From a technical perspective, the stock looks to be putting in a tradeable base here. This gives traders a support level to work with.
Remember there are options on this one, something unusual for most post-SPAC companies this early in their story. You can use these in combination with the warrants as a hedge, or risk mitigation tool.