Virgin Galactic: How You Could Have Gotten a 34% Discount on Your $250,000 Space Ticket

This one is going out to all of the Tesla driving, Canada Goose wearing, country club dinner on the weekend crowd. You’re about to get one upped so bad you’ll feel like Zion Williamson just postered you.

Get ready for it. Next fall, around this time, you could easily be in this conversation.

“So, what did you and the family do this summer?”

“We stepped it up a notch this year, with the promotion and everything. So we did a week cruising the Mediterranean, an Eco tour in the Arctic Circle, and then to fill out Chad’s resume, we did a quick stopover and planted some trees in the Amazon. What about you guys?”

“We headed to New Mexico.”

“New Mexico?!?! What the hell is in New Mexico?”

“Oh, we trained for a week and then went into SPACE. It’s true what all those astronauts say. Once you’ve seen the Earth from space all of the earthbound vacations really do pale in comparison. Maybe I saw you cruising in the Med from orbit! Check out my space boots, I’m wearing them now. Under Armour believe it or not.”

It’s coming. And sooner than you think.

Virgin Galactic…3,2,1

Next year Richard Branson’s Virgin Galactic plans to start ferrying tourists to space for the first time. At $250,000 a pop, over 600 people have already paid, and the waiting list is in the thousands and growing.

Branson, fully decked-out in his space suite, took the company public today on the New York Stock Exchange (NYSE).

It appeared to be a normal IPO, as Bob Pisani counted down the minutes on CNBC for the stock to open. Apart from Branson arranging for actual fireworks to be set off on the NYSE floor, the average investor would have thought nothing unusual was happening.

The stock trades under the symbol SPCE. Branson said he’d love to tell the story of how the company got the ticker, but he was sworn to secrecy.

But, for a few intrepid investors, none of whom have actually been to space yet, the payday was a lot sweeter than for the average investor who bought the IPO this morning.

You’re probably thinking, oh yeah, those wealthy guys that have a hundred million dollars with their broker and get allocated shares early before anyone else. Nice gig if you’re already wealthy.

Nope.

These were just people paying attention to an emerging pattern that is taking hold on Wall Street.

The SPACs are Among Us

A pattern that the new Chairman of Virgin Galactic, Chamath Palihapitiya, believes will eventually replace the current IPO process and supplant the IPO “monopoly run by Morgan and Goldman.”

Whether you agree with Palihapitiya, a former senior exec at Facebook and part owner of the Golden State Warriors, or not, you can make money like an IPO insider if you learn this simple pattern.

The pattern starts with a SPAC, or Special Purpose Acquisition Company. Don’t worry, we’re not going to devolve into Wall Street gibberish here.

All you have to know is that it’s a stock that is already listed on a stock exchange. But, unlike other stocks that give you ownership in a “company” that is producing and selling something, this stock gives you ownership of, literally, money in the bank.

Think of it like a big piggy bank. The money in the big piggy bank is ready to buy a private company. And, well known business managers, investors, etc. are in charge of the piggy bank. The Wall Street guys.

Their goal is to find a company to give the piggy bank of money to. And, in exchange for the money the company gets to list it’s stock on the stock exchange (using the SPAC shares that are already trading), but without a LOT of the hassle of doing a regular IPO.

(If you watch the video where Palihapitiya describes his SPAC’s purchase of Virgin Galactic, I’m giving you the Investing for Dummies version of what he’s talking about.)

Each SPAC Has a BIG ANNOUNCEMENT

So, once the managers of the SPAC find a company to buy, here it was Palihapitiya, and the SPAC was called Social Capital Hedosophia (don’t worry, most of them have some weird name that uncreative Wall Street types make up…it has nothing to do with what company they actually buy), they make an announcement about it.

In this case, the Social Capital SPAC decided to buy Virgin Galactic. The stock of Social Capital traded under the symbol IPOA until today (10/28) when Virgin Galactic “went public”.

So, at this point you might be thinking, when they make that announcement, that they are going to buy, in this case, Virgin Galactic, the stock of Social Capital probably went a lot higher. No way I can watch CNBC 24/7 for these announcements.

But, surprisingly, that’s not what happens at all. You see there is one more important step that has to happen before the company being bought gets the SPAC piggy bank in return for having a publicly traded stock.

Hang with me here. This is the critical point. It’s where we separate the “Nice, 50% for holding that thing for a few days” from the “What, what do you mean you’re getting your ticket to space for only $165K…I thought it was $250,000!?!?!”

You see there’s another step, after the big announcement that “we’re buying so-and-so” that the shareholders of the SPAC need to take. Remember, these are the ones who bought the stock before they knew who was getting the piggy bank. They have to hold a vote to approve the merger.

Not All SPACs Are Created Equal

Let’s pretend you bought shares of a SPAC called “We’re Going to Buy a Space Company.” A few months later the management, a mix of former Wall Street and NASA guys, have a big announcement.

They have found a company that they love. It’s a company building a space hotel that guests can stay in to orbit the earth. Awesome, let’s do it.

How much does that bad boy cost? Can I use my Marriott points? Stay two nights get one free?

The next statement from management is that it only costs $9.5 million per person. Sound of screeching tires. (And yes, it is a thing.)

You’re a stock owner, and therefore part owner of the piggy bank. And, as someone with a business acumen of at least a 10 year old, you’re first thought is, “Nope, I’m pretty sure I could launch my own hotel into space and charge just $9 million. So, I’m out.”

Now, just like you thought the stock would go up on the announcement that a SPAC is buying a good company. You might think it would tank if shareholders realize management is off it’s rocker and wants to buy a pipe dream.

Again, nope.

Remember that important vote? Well, if owners of a SPAC’s stock decide that management has maybe spent a little too much time in space themselves, they can vote against using the piggy bank to buy a bad company.

Management then breaks the piggy bank open and gives everyone their money back. No harm, no foul. (Or you can just sell your shares the same as you would any stock, and the price won’t drop because it’s backed by the piggy bank.)

Sounds kind of like a no risk investment, at least before the vote for the acquisition. Yep, that’s what it is.

Finding the Good Companies

Now, let’s get back to the smart SPAC managers. The ones who buy really cool companies that are run by Richard Branson, fly people to space, and already have 600 customers who have paid to fly.

You’re job, and whether you can make some nice hot IPO type returns, is to tell the difference between the good SPAC acquisitions and the bad ones.

I’ll be honest. It isn’t always that clear cut. In most cases it’s neither a really good or really bad company SPAC management wants to buy. It’s just OK.

But, since we’re ONLY looking for the really cool homerun types of companies that a SPAC might buy, it actually makes this trade pretty easy. There won’t be many good deals, but the ones that come along can mean big paydays with little risk.

So far this year there have been two really good SPAC trades that fit this pattern, and some other close ones. Obviously, since this story is about Virgin Galactic, it’s one of the homeruns.

(The other was Akerna (KERN) which I told my blog readers about one month before it went from $10 to over $70 in a few days. The SPAC was MTEC before becoming KERN. You can read the post here.)

You could have purchased Virgin Galactic, when it was still Social Capital, the week before the shareholder vote for $10.50 (you could have actually gotten it for less, but let’s keep the numbers round).

Then today, at the “IPO”, the stock traded as high as $12.93 before pulling back. Let’s say you didn’t catch the top, but sold at $12.80. That’s a 22% return in just over a week. Not bad.

You Say SPAC, I Say Warrant!

Now let me throw in a little wrinkle. I won’t go into detail here, remember, no Wall Street gibberish. But, each SPAC has stock, and they each also have a warrant.

A warrant is like a call option. If you own it you have the right to buy common stock at a certain price.

Again, I don’t want to discourage you from looking at these trades. So ignore the warrants if you want to.

But, I told my paid readers to own the warrants going into Friday the 18th. Again, the week before the shareholder vote.

You could have easily bought the warrants at $2.45 that week. I know, because I bought a few tens of thousands myself.

Today, those warrants traded up to $3.65. If you traded it just right, that’s a 49% return in just over a week. And if you didn’t catch the very top, you made a little less.

There’s your discounted ticket to space!! (If you’d put around $165,000 into the trade just over a week ago, you could have sold today for $250,000!!)

And, if you chose not sell those warrants, you’ve got a 5 year option to buy SPCE for $11.50 you paid $2.45 for. Probably not a bad bet.

Update, as of 2/12/2020: After being long the warrants, here is how I’ve been trading the Virgin Galactic the past few weeks as the stock has taken off.

Learn the Patterns, Make the Money

Who knows if Mr. Palihapitiya is right or not. Maybe SPACs begin to replace the IPO market run by Goldman and Morgan Stanley.

But, with more and more SPACs listing almost every week, one thing is absolutely certain. There WILL be more plays like this, and my readers and I WILL make money from them.

Hope to see you at StockWarrantsHQ.com. Let me know if you have any questions!!

You can always reach me at stevenadams@stockwarrantshq.com.