
Virgin Galactic Investors Are Swimming in Seth Klarman’s ‘Speculative Froth’
Current valuations of the company, like its space ship, are in the stratosphere and need to come back down to earth
In his 2013 letter, longtime value investor Seth Klarman warned that current valuation levels of the market at that time had become unmoored from any sound fundamental analysis or methodology, and instead were indicative of a “speculative froth” that had suffused the markets. Klarman noted that far too many market participants had learned nothing from the 2000 dotcom fiasco.
Klarman noted the price of many stocks was a reflection that the market was “mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course.”
He also warned that in bull markets, it is never difficult to assemble analysts and investors who form a “coalition of willing” that is motivated by “flash mob speculation.”
When one examines the latest frenzy surrounding the meteoric rise of Virgin Galactic Holdings Inc., Klarman’s comments come to mind. Will his warnings yet again prove prophetic with regards to the pioneering spaceflight company? Or is his thinking too “old school” and too stodgy to appreciate and understand the new method of stock valuations for the incipient space age? What would “Star Trek’s” Spock have to say about all this?
Last Tuesday, Virgin Galactic reported a fourth-quarter net loss of $73 million on revenue of $529,000; FactSet had forecast revenue of $748,004. Overall, the company reported a net loss of $210.9 million for 2019. The loss in 2019 comes on the heels of net losses of $138 million in 2017 and $138 million in 2017. The company’s earnings before interest, taxes, depreciation and amortization loss of $55 million far exceeded the consensus estimate of $47 million. Fourth-quarter revenue of $529,000 was well below the $800,000 in revenue from the previous quarter.
Given these dreadful numbers, how does one explain the price of the stock? The shares have increased almost 200% over this past year. The price has increased over fourfold since early December. After Tuesday’s close, the stock dropped precipitously to $28.75; it is currently trading at $20.88. Even at it its current price, Virgin Galactic trades at almost 1,000 times