Morgan Stanley: It's About Time Virgin Galactic (SPCE) Saw a Correction

When a stock gains 310% in just three months, you know that someone's putting some real weight behind it. Even if the overall gains haven't been as pronounced as Tesla's, Virgin Galactic (NYSE: SPCE) has been on an upward tear, and some are already calling for a stock correction to come. One of the leading voices in that vein is none other than Morgan Stanley, who believes Virgin Galactic's voyage should be hitting some chop soon.

Morgan Stanley's Modest Correction Proposal

The word came from Adam Jonas, Morgan Stanley's analyst, who noted that not only would a modest correction be due—overdue, really—but also be healthy for the company going forward. Jonas made as  much clear by titling the related note sent out to investors “even spaceships must return to Earth.”

Jonas elaborated a bit on his belief of a correction, noting that the stock was already trading at nearly double the price target of $22—as of this writing it's at $41.05—and only about $20 under the bull case figure of $60.

One of the biggest issues Jonas noted with Virgin Galactic was that it was tough to identify specific events in the company's operation that would lead to improving per-share prices. Jonas noted that this has been the case since December 2019, though the stock has gone up rapidly anyway.

Dumping In More Rocket Fuel

With the stock trading at elevated levels, Jonas noted that some investors likely to ask why the company isn't taking advantage to raise more capital. Jonas noted that the company already has enough liquidity on hand to take care of current operations, including the launch of a commercial service. Still, Jonas acknowledges that investors might still ask why the opportunity isn't being taken to add a little extra cushion to the coffers. After all, as even Jonas brought up, the market is unpredictable, and having more capital than is strictly needed is seldom a bad thing.

Jonas further noted that extra capital would be helpful for Virgin Galactic's development operations, including long-distance travel at hypersonic speeds. Jonas suggests that this is about a decade away, but would open up a new line of business for Virgin Galactic as it looks to take what it's learned so far going upward at such speeds and branch out into more horizontal alternatives in terrestrial travel.

To Boldly Go Where Few Stocks Have Gone Before

Granted, right now, Virgin Galactic looks pretty attractive. There aren't exactly a lot of competitors in the privately-managed space race concept, which likely helps account for why SoFi and Fidelity, among others, are noting that Virgin Galactic is popular with retail investors. This is even beyond Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA).

Reasons behind the run-up make sense; the price is still sufficiently low that even small-scale retail investors can get in on the action and buy a little piece of what may be one of the biggest pushes on the final frontier there is. Even if things don't go exactly as planned, the chances of Virgin Galactic folding up altogether are slim, and the company can keep going. Its attempted diversification plans—using what it's learned about hypersonic travel to produce a new line of high-speed air travel options—couldn't hurt either. With SpaceX and Blue Origin both private, however, Virgin Galactic is the only publicly-traded option around.

However, there are some concerns, as some are pointing out. Earlier reports suggested that Virgin Galactic would be ready to start at least some space tourism operations by this summer, though there are signs that the company is pulling back on those expectations a bit. Given what's going on in China these days—where a lot of Virgin Galactic's spare parts are likely coming from (not to mention those of many other companies)—short-term tempered expectations should be normal.

What's more, some of the basic fundamentals aren't exactly stellar either. Hefty operating losses have marked much of Virgin Galactic's recent operations to the point where even the Washington Post was calling it “a huge financial risk” back in late October.

The potential behind being an early investor in a space-faring company is enormous. Space tourism is just the start; between the notion of lunar real estate and the massive possibility that is asteroid mining, space could be the next internet, only so much more so. It's worth pointing out, though, that we are still in very early days here, and though Virgin Galactic might be appealing, it's not likely to go to the moon just yet.