The mood towards riskier investments appears to have shifted on Wall Street as Virgin Galactic and Tesla soar to new highs, but is it time to take a step back? %
Feb. 21, 2020
Investors are becoming bored with ‘safe’, S&P 500 (NYSEARCA: VOO) returns, and are looking to double their money on a weekly basis. This is the impression one might get anyway from the market’s behavior towards stocks such as Virgin Galactic (NYSE: SPCE) and Tesla (NASDAQ: TSLA).
With Tesla close to doubling its value in 2020 alone and Virgin up nearly 350% in three months, investors are pouring money into riskier stocks in what is beginning to look like late-cycle market behavior (although analysts also said this last year too).
Changing of the guard
Let’s be honest: electric cars and rockets are so ‘in’ right now. Young investors don’t want to pour their money into ‘boomer’ stocks such as Apple (NASDAQ: AAPL) or Microsoft (NASDAQ: MSFT) anymore, not when the fairytale of driving your ‘Model S’ Tesla to Virgin’s Mojave headquarters to take a rocket to space is fast becoming a reality.
Private space companies are certainly taking the market and media by storm; Elon Musk has SpaceX, which announced its plans to take tourists to space this week, while Amazon (NASDAQ: AMZN) CEO Jeff Bezos also has his own project: Blue Origin.
It now might be time for some semblance of prudence though, as none of us know when the next recession might hit.
Investors need to be careful
Virgin Galactic is still burning through money as fast as its rockets burn through fuel, losing $138 million in the first nine months of 2019. Profit isn’t even in its vocabulary at this point in time, and the company’s sole source of revenue appears to be the 600-odd passengers which signed up to fly to space at $250,000 per head.
Sticking with this, CEO George Whiteside, a former NASA chief of staff, has been decidedly withholding in regards to when these trips to space will take place. Following a rocket test last week, the question of whether Virgin flights will happen by summer 2020 was asked, to which he responded:
“In this business, we have to take every step — step by step and do it safely. Yesterday’s flight was huge in the sense that we took our beautiful spaceship down to spaceport America and it was a really important flight. And now what we can do is we’ll check out the vehicle and we’ll start moving through our progression of tests.”
This prudence is in stark contrast with the Adam Neumann-esque optimism portrayed when the company first went public last year. Management projected a 580% jump in revenue to $210 million between 2020-2021, as well as EBITDA profitability by 2021. However, if the company should be walking back on these projections, it will be a massive red flag for investors.
Virgin Galactic will report its Q4 2019 earnings on February 25th. I am still a big fan of the company, but I also believe more transparency is needed if it is to succeed. To learn more about Virgin, you can read this article:
Tesla stock is not without risk
Tesla has actually been a publicly-traded company for a long time. However, it is becoming more and more popular among millennial investors, despite not yet posting a full year of profitability.
Even though its last earnings report was a great success and the stock is performing brilliantly this year, there are warning signs that investors are ignoring, leading to the sometimes illogical nature of Tesla’s stock price.
It might seem like the only name in electric vehicles right now, but Tesla does have some significant competitors. More established car manufacturers such as Ford (NYSE: F) and General Motors (NYSE: GM) are building fleets of electric vehicles to challenge Elon Musk, while smaller challengers such as NIO (NYSE: NIO) are also emerging, which has often been referred to as ‘The next Tesla.’
On top of this, Tesla is also expanding into larger markets, which can either be a game-changer or a cash vacuum. The company’s new Shanghai Gigafactory has been a massive success, churning out 1,000 cars a week, but its planned German factory is already fraught with issues before it’s even been built.
Between that and the havoc caused by the coronavirus in China, full-year guidance could quickly change.
The market has a short memory
It is important to remember that the market can turn very quickly and any novice investors pouring all of their money solely into the Virgin and Tesla may be in for a painful lesson. Right now, these stocks are on top of the world and with any luck, they will stay there, but it is also very possible that they could come crashing down due to one bad earnings report, or in Virgin’s case, a literal rocket crash.
Never forget that Under Armour (NYSE: UAA) was once the darling of Wall Street.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Tesla and Virgin Galactic. Read our full disclosure policy here.