Virgin Galactic shares take off without Ark Invest

Virgin Galactic’s [SPCE] share price has been having a particularly eventful time so far in 2021.

Before tumbling as low as $15.50 on 13 May — down 34.7% in the year-to-date —the stock set a new all-time high on 11 February as Virgin Galactic’s share price cleared $60 during intraday trading.

However, Virgin Galactic’s share price has staged an even more impressive rally in recent days, climbing 27.6% over the weekend between 21 May and 24 May. Virgin Galactic’s share price was up 31% year-to-date on 27 May, when it closed at $31.09.

Given this decline and sharp recovery, the previous three months might seem like the worst time imaginable to be selling off the space exploration company’s stock. However, this is exactly what one of Wall Street’s most-lauded investors has done.

A galactic sell-off

Catherine Wood’s Ark Invest has delivered out-of-this-world returns over the past 12 months, but some of the firm’s decision-making in recent weeks has been on another planet.

The firm invested heavily in Coinbase [COIN] and published a research note claiming to tout Bitcoin’s environmental credentials, before Elon Musk, CEO of Tesla [TSLA], sent the cryptocurrency market into a tailspin by criticising the fossil fuel usage that blockchain mining entails. Now, Ark Invest has missed out on positive sentiment following a successful test launch by Virgin Galactic, which sent the space tourism project’s share price skyrocketing.

On 22 May, Virgin Galactic’s long-delayed third flight test finally went ahead. The milestone erased doubts that had seen its stock lose over 11.3% in the year-to-date (through 21 May), pushing the stock up 27.6% on 24 May. The test flight was the first of four that are required prior to commencing commercial flights, which Virgin Galactic hopes will begin early next year.

Since April, the ARK Space Exploration & Innovation ETF [ARKX] has jettisoned the entirety of its position in Virgin Galactic, which had stood at circa 672,000 shares at the time of the fund’s launch in March. The remainder of Ark Invest’s 1.7 million share position, worth $100m at the time of Virgin Galactic’s February all-time high, had been held by the ARK Autonomous Technology & Robotics ETF [ARKQ]. According to Bloomberg, the firm boosted its holdings to 2 million shares between February and May, during which time Virgin Galactic fell 60%, before selling virtually all shares before the successful flight. The final 12 shares held by Ark Invest were sold on 25 May.

Market analysts responded positively following the successful flight by Sir Richard Branson’s (pictured above) team. Douglas Harned, managing director of Sanford C Bernstein & Co, said in a note to clients, as reported by CNBC: “We believe this business can have highly attractive economics if risks can be managed.” Bernstein increased its price target from $18 per share to $27 in response to the news.

However, Virgin Galactic’s share price performance still trails far behind its February highs. Competition from Amazon’s [AMZN] Jeff Bezos and his space firm Blue Origin, and even cryptocurrency market mover Elon Musk, has eroded the company’s first-mover advantage in the futuristic space tourism industry.

Additional risks still exist in the form of the results of the outstanding test flights and the total value of the enterprise. “Any serious incident could be disastrous for the business,” said Harned. “Terminal value is unclear, as it is hard to assess how far the value proposition will extend.”

"Terminal value is unclear, as it is hard to assess how far the value proposition will extend" - Douglas Harned, Sanford Bernstein & Co

Space for more

Despite the misstep with Virgin Galactic, the ARK Space Exploration & Innovation ETF gained 6.7% between 21 May and 26 May (in the days following Virgin Galactic’s successful test flight). It isn’t, however, the only space ETF in the universe for investors to consider.

Both the Procure Space ETF [UFO] and the SPDR S&P Kensho Final Frontiers ETF [ROKT] hold Virgin Galactic, as well as other space companies. Neither of these have performed significantly better than the ARK Space Exploration & Innovation ETF in that time period, suggesting that in the context of the overall space theme, tourism is a fairly minor component.

Virgin Galactic is the Procure Space ETF’s 12th-largest holding at 4.41% of the fund’s assets (as of 27 May), and the 18th-largest holding in the SPDR S&P Kensho Final Frontiers ETF, with 4.03% of assets (as of 27 May). The Procure Space ETF has gained 18.8% in the year to 27 May and 4.2% since 21 May, while the SPDR S&P Kensho Final Frontiers ETF has gained 8.9% and 3.9%, respectively, in the same periods.  

However, the ARK Space Exploration & Innovation ETF is down 0.3% since its March launch (through 27 May), perhaps as a result of the costly Virgin Galactic sales.