Last Friday, Virgin Galactic Holdings (NYSE:SPCE) shares had a surprisingly strong reaction to news that regulators have cleared the way for the company to eventually begin flying passengers into space. The market has been rethinking that reaction in the days since, with the stock off more than 10% on Tuesday afternoon after a down day on Monday.
Virgin Galactic’s announcement on Friday that the Federal Aviation Administration (FAA) has approved the company for passenger space flights was certainly good news, but it was still somewhat surprising to see the stock jump 30% higher based on the announcement. After all, while nothing is a given, FAA approval was assumed and expectations that Virgin Galactic was back on schedule after a series of setbacks was a big reason the stock had rallied 40% higher in May.
In the days since, the markets have seemingly rethought the level of enthusiasm. On Monday, Alembic Global analyst Peter Skibitski downgraded Virgin Galactic to neutral from overweight, saying valuation is “now stretched to excess levels.”
And analytics firm Paragon Intel released a report noting the massive expenses the company still has ahead, as well as continued skepticism about the total addressable market for six-figure space tourism flights.
It’s worth noting that even with the declines Monday and Tuesday, Virgin Galactic shares are still up nearly 20% since July 24. This stock has been volatile since Virgin Galactic went public via a merger with a special purpose acquisition company, and the turbulence is unlikely to subside any time soon.
On the one hand, the FAA decision means Virgin Galactic is a step closer toward its goal of ferrying paying customers into space, and at least one layer of uncertainty surrounding the stock has been removed. On the other hand, this is still a company valued by the market at more than $11 billion despite having little to no revenue, an unproven business model, and rising competition from the likes of Jeff Bezos’ Blue Origin.
It’s still too soon to know how things will work out for Virgin Galactic, and the stock’s movement reflects that uncertainty. Even if you believe in the potential, it’s best to limit this sort of a stock to a small part of a well-diversified portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.