- Virgin Galactic stock surged as much as 21% on Monday after Morgan Stanley initiated coverage on the company with a buy-equivalent rating
- The firm said Virgin Galactic has the potential to "disrupt the multi-trillion-dollar airline" industry.
- The bank also issued a $22 price target for the stock, implying a 203% surge through December 2020 from Friday's closing price.
- Virgin Galactic's space tourism business will drive growth in the near term and help launch a hypersonic travel industry, the analysts wrote, predicting the new technology could drive $800 billion in annual sales by 2040.
- Watch Virgin Galactic trade live here.
Morgan Stanley also issued a $22 price target for the stock, saying the company offers "biotech-type risk/reward" and has the potential to "disrupt the multi-trillion-dollar airline" industry. The aerospace company closed last week at $7.26 per share, leading the bank's note to imply a 203% surge through December 2020.
Virgin Galactic's space-tourism business is only worth $10 per share, the team of analysts led by Adam Jonas said Monday, and the greater investment opportunity comes from hypersonic point-to-point travel.
The team split Virgin Galactic's future into three phases. The first two involve 90-minute space trips for wealthy consumers and, subsequently, an expanded space-tourism business involving more than 3,000 passengers by the end of the next decade.
The third phase of the firm's business model includes hypersonic travel, with $800 billion in annual sales arriving by 2040, according to MS. The futuristic transport opportunity drives $12 per share in the bank's price target. Sending a customer to space and back safely is "the key catalyst" to driving a hypersonic travel industry, the analysts said, and those who believe space tourism is the most promising opportunity are mistaken.
"While some investors have described high-speed hypersonic P2P travel air travel opportunity as 'the icing on the cake,' we see Hypersonic as the cake and the icing, with Space Tourism as the oven," the analysts wrote.
The bank's analyst pointed out a trove of risks facing the company as it seeks to enter a new and relatively unexplored sector. Virgin Galactic is "possibly one passenger fatality away" from strict regulatory scrutiny, they said, mentioning Boeing's 737 MAX controversy.
The company may face difficulty in making a case for space tourism, they added. Though the population of millionaires is rising, Virgin Galactic's future relies on fundraising from its tourism business. Should the company find demand to be far weaker than anticipated, a lucrative hypersonic travel business may never leave the ground, MS wrote.
Virgin Galactic traded at $8.61 per share at 2:33 p.m. ET Monday, down roughly 15% year-to-date.
The company has three "buy" ratings, no "hold" ratings, and no "sell" ratings from analysts, with a consensus price target of $19.11, according to Bloomberg data and the Morgan Stanley research note.
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