Credit Suisse says to buy Virgin Galactic stock for its ‘near-term monopoly’ on space tourism – CNBC

Credit Suisse began coverage of Virgin Galactic with an outperform rating Thursday, saying in an a note titled "The Ultimate Joyride" that the firm sees multiple factors driving the space tourism stock higher.

"Our bullish view reflects the near-term monopoly SPCE offers in an industry (commercial space tourism) where public investment opportunities are scarce. We view this as a classic tech-driven high demand, low supply story with high barriers to entry," Credit Suisse analyst Robert Spingarn wrote in a note to investors. "Not everyone will see the value, but we believe the math works nonetheless."

Virgin Galactic shares rose in premarket but later dropped, closing down 7.4% at$9.10. Credit Suisse has a $12.43 price target on the stock, essentially seeing 36% upside over the next year. The firm is the second to begin covering Virgin Galactic with a buy recommendation: Vertical Research Partners is also bullish on the opportunity.

The stock has slid since its public debut last month, down about 20%, but that doesn't worry Virgin Galactic Chairman Chamath Palihapitiya. He expects Virgin Galactic to begin flying its first customers as early as May, saying on Wednesday that flights "will begin in about six to nine months."

"I think the story of Virgin is just so new that it hasn't been written yet. We'll start commercial operations in the middle of next year, so the full-fledged business value will become apparent very quickly to a lot more people at that point," Palihapitiya said in an interview with CNBC's Seema Mody on "Closing Bell."

Credit Suisse agrees, saying the stock's upside largely depends on how closely Virgin Galactic sticks to its schedule and begins flying people.

"We believe the greatest single catalyst would be successful completion of the first commercial flight," Spingarn said. "From here, losses should dissipate rapidly as flight activity rises."

Virgin Galactic spacecraft Unity fires its engine and heads to space with its first test passenger on board in February 2019.

Virgin Galactic | gif by @thesheetztweetz | CNBC

At $250,000 per person, Virgin Galactic's ticket revenue is about three times the cost of each flight, Credit Suisse noted, "which would drive very attractive incremental margins." The company's spacecraft holds up to six passengers along with the two pilots.

Spingarn says Virgin Galactic "has a distinct first-to-market advantage" in space tourism, estimating nearest competitor Blue Origin is at least two years behind. And even when Blue Origin does start flying people, the company is inaccessible to public investors as it is wholly owned and funded by Jeff Bezos.

Credit Suisse also mentions SpaceX, with its fully reusable Starship rocket, as a long-term threat to Virgin Galactic's business.

"While SpaceX does not appear to be as focused on space tourism, a point-to-point solution serviced by Starship could convert space travel from a novelty experience to a commodity service," Spingarn said.

Virgin Galactic is thinking about the potential of high-speed, long distance travel, also known as point-to-point space travel. Boeing's venture arm HorizonX last month invested $20 million into Virgin Galactic to explore developing a vehicle capable of flying around the world at hypersonic speeds. But SpaceX is a notable risk to Virgin Galactic's future business, Credit Suisse said.

"Unless Virgin is able to offer a similarly compelling point-to-point solution, the arrival of point-to-point by competitors could damage the overall [total addressable market] for space tourism and, therefore, the long-term demand profile," Spingarn said.

Finally, Credit Suisse warns that any major accident or malfunction would likely substantially slow Virgin Galactic's business. In 2014, an accident during a Virgin Galactic test flight killed a co-pilot.

"We assign a $0 value in the case of a catastrophic event (e.g., a fatal crash)," Spingarn said.

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Credit Suisse says to buy Virgin Galactic stock for its 'near-term monopoly' on space tourism - CNBC