Shares of commercial spaceflight expert Virgin Galactic (NYSE:SPCE) are moving up noticeably on Wednesday. Despite a broader pessimistic view on the company, Truist Securities just broke rank and upgraded its assessment. This surprising pivot could prove prescient, however, especially given the risk bearish traders face if SPCE stock squeezes higher.
According to Seeking Alpha, Truist analyst Michael Ciarmoli believes that Virgin Galactic’s “operational prospects” remain unchanged. However, management made a decision to halt commercial operations in the middle of this year to focus on deploying capital toward the development of its Delta fleet. This spacecraft should be able to carry 50% more passengers and launch twice a week once fully operational.
As a result of targeting resources and attention to the developmental side of the business rather than commercial flights, significant upside or downside catalysts have been removed in the near term. One modest risk is that SPCE stock may be in a general holding pattern until commercial operations are targeted to restart in 2026.
At the same time, Virgin Galactic should avoid any near-term liquidity concerns. As of Sept. 30, 2023, the company carried approximately $1.1 billion of cash and marketable securities. All told, Ciarmoli upgraded SPCE stock to a “hold” rating with a price target of $3.
SPCE Stock Could Possibly Squeeze Higher
Despite this more constructive view of SPCE stock, Ciarmoli isn’t ignoring the risks with Virgin Galactic. “SPCE expects cash burn of $125- $135M during 4Q and anticipates annual cash burn in 2024-2025 to be below 2023 levels,” the analyst said in a research note. The expert added the following:
“Should the company utilize more cash than anticipated during the process of developing its Delta fleet, we do expect that raising additional capital will be challenging in the current environment and would likely be in the form of dilutive at-the-market equity offerings. We note that founder and ~8% shareholder Richard Branson has stated that he does not plan to invest any additional capital in the company.”
Nevertheless, SPCE stock could also move higher due to the pressure imposed on pessimists by contrarian bulls. For one thing, bearish traders are directly shorting Virgin Galactic. According to Fintel, SPCE’s short interest stands at 22% of its float. The short interest ratio also clocks in at 11.28 days to cover. This figure represents the number of trading sessions needed to cover all bearish bets based on average trading volume.
Fintel’s screener for options flow — which filters for big block transactions likely made by institutions — reveals heightened volume for sold calls as well. This particular type of underwritten risk can be problematic due to the obligation of call writers (sellers) to fulfill the terms of the contract, should the bet move against them.
Therefore, for bearish traders in the open and derivatives market, an unexpected lift in SPCE stock could cause a panic. And of course, the subsequent covering action would lift shares, benefitting the bulls.
Why It Matters
At the moment, analysts rate shares as a consensus moderate sell on TipRanks. This assessment breaks down as one buy, two holds and three sells. Overall, the average price target sits at $2.30, just below parity against SPCE stock’s price as of this writing.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
