Galactic Virgo (NYSE:SPCE) stock is down more than 45% this year, signaling trouble not just for the company, but possibly for special-purpose acquisition companies as well.
Understandably, many people took an optimistic view when Virgin Galactic entered the public domain via a reverse merger.
Although some analysts have warned against the dilutive nature of the after-sales service after the business combination, the narrative behind SPCE stock was simply too compelling to ignore.
Of course, hindsight being 20/20, those same early believers—if they hadn’t given up yet—probably wish they had. More worryingly, not only could Virgin Galactic fall again, but it could be a signal that the entire SPAC framework is even more fragile than we thought.
A Closer Look at SPCE Stocks
Although estimates vary from one research firm to another, information compiled by the United States Chamber of Commerce suggests that at the high end of the range, the The space economy could reach $1 trillion by 2040.
From there, it starts to look like Virgin Galactic is a platform to get the juices of the space economy flowing, more than a serious space game.
According to a shareholder lawsuit which targets Virgin Galactic founder Sir Richard Branson and former SPAC chairman and sponsor Chamath Palihapitiya.
Filed on March 1, the lawsuit “alleges that several insiders, including Branson and Palihapitiya, sold shares in the space tourism startup even though they were aware that some of the company’s ships faced sustainability issues that had not been publicly disclosed”. by a Barrons report.
The article goes on to state that “sustainability issues, disclosed in October 2021, delayed the start of Virgin Galactic’s commercial service and impacted the company’s share price.”
Personally, I felt a trial was inevitable. Yes, retail investors must take responsibility for their own decisions. However, the SPCE stock has been heavily hyped, and for what? Stocks are down 71% in the past year and, as I mentioned, they are already down 45% this year.
Virgin Galactic may cut other SPACs
According to a particularly damning the wall street journal the article, the The SPAC vessel sinks. As he says, “the hype is giving way to reality. Like so many other ways of investing, what initially seemed like a way to make easy money turned out to be fraught with potential dangers.
One such peril is the threat of tighter regulation, which would seem to discourage sponsors and other corporate insiders from going the SPAC route.
As you know, the process of merging a private company with a publicly traded shell involves less onerous regulatory oversight than a traditional initial public offering would warrant.
If SPAC sponsors are unscrupulous — and at least some are — these blank check companies represent an easy way to squeeze money from retail investors. Put in regulations, and suddenly the crowd dissipates.
It is also incredibly problematic that by a Reuters report, SPAC reimbursement rates averaged around 60% towards the latter months of 2021. In short, this means that investors would rather absorb the opportunity cost of keeping a blank check company for several months than go ahead with the proposed merger.
It’s frowned upon and the SPCE action makes the situation putrid.
Not all SPACs are the same
To be clear, not all SPACs are the same. Some have done well as a result of their business combinations. Or at least until the markets decide to go haywire.
However, the harsh reality is that the SPCE stock was one of the SPAC heroes if you will. But following its implosion – and assuming it only gets worse from here – Virgin Galactic has become the investment equivalent of “Shoeless” Joe Jackson.
It’s not pretty and you might want to consider cutting your losses.
As of the date of publication, Josh Enomoto had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto helped negotiate major contracts with Fortune Global 500 companies. Over the past several years, he has provided critical and unique insights to the investment markets, as well as various other industries including law, construction management and healthcare.