Stock of the week - Virgin Galactic (15.07.2021)

So far, it has been a big week for Virgin Galactic (SPCE.US) and its founder Richard Branson. Virgin Galactic launched a test spaceflight and it was a successful one. However, shareholders of the company do not have reasons to cheer as the company's stock shed more than a third of its value over the past 4 days. Let's take a closer look at the reasons behind the drop.

Successful spaceflight

Virgin Galactic is a spaceflight company led by billionaire Richard Branson. Branson wants to make space tourism commercially viable and last weekend proved that he is getting closer to achieving its goal. Virgin launched a test flight of its VSS Unity space plane on Sunday. Event was closely watched as Branson himself was among passengers. VSS Unity has successfully reached an altitude of over 86 kilometers before gliding back to Earth. Space plane landed around one hour after takeoff. Test went flawlessly and the fact that Branson was confident enough to participate, showed that Virgin Galactic may begin commercial space flights in the coming years. Shares of the company traded over 10% higher in premarket trading on Monday.

Share offering

However, the company's shares eventually launched the week little changed. Why? Virgin Galactic filed on Monday to sell shares worth up to $500 million via at-the-market offering. Fact that it is an at-the-market offering shows that it is mostly targeted at retail investors. Virgin Galactic was one of companies that was embraced by the retail crowd during the meme stock rally. Markets usually reacted negatively to share offerings and there are two main reasons behind it. Firstly, offering new shares dilutes ownership of current shareholders, meaning they own a smaller stake in the company and its profits. Secondly, equity offering is an expensive form of financing. Decision to raise funds this way may hint that Virgin's management sees current stock valuation as high.

Technical situation

Announcement of a $500 million share offering changed sentiment towards the stock massively. Not only has it erased a double-digit premarket gain to open little changed on Monday, it also finished Monday's trading 17.3% lower! Tuesday and Wednesday did not bring recovery with stock falling further - 7.2% on Tuesday and 12.42% on Wednesday. Adding a 6.6% drop on Friday, we arrive at a combined 4-day drop of over 37%! Situation looks to have calmed slightly with the stock trading flat in today's premarket. However, even after such a steep drop, Virgin's YTD gains outperform S&P 500 significantly - Virgin is almost 40% up year-to-date compared to S&P 500 gain of 16.4%.

Taking a look at Virgin Galactic chart (SPCE.US), we can see a steep share price dive. Stock dropped below the 35-period EMA on H4 interval, which acted as both support and resistance in recent months. Note that a break above this moving average in May was followed by a 200% rally therefore break back below this moving average may be seen as a worrying sign. Key near-term support to watch can be found at $30.70 and is marked with 61.8% retracement of the upward move launched in May 2021.

Source: xStation5