Virgin Galactic shares dive after Morgan Stanley and Credit Suisse downgrade the speculative stock

Published Thu, Feb 27 20206:58 AM ESTUpdated Thu, Feb 27 202011:36 AM EST

Virgin Galactic recently took on the mantle from Tesla of the market's hottest speculative stock, with retail investors jumping in with both feet. But the bubble has popped this week in the space tourism play and losses are accelerating Thursday as two major Wall Street backers downgraded the shares. Morgan Stanley's Adam Jonas downgraded the stock to equal-weight from overweight in a note titled, "Waiting for the fundamentals to catch up." Credit Suisse's Robert Spingarn cut the shares to neutral from outperform, saying, "We find ourselves no longer able to recommend SPCE shares" after the stock's run this year. Virgin shares fell more than 21% in midday trading. Through Wednesday's close, the stock was down 23% this week. It's still up about 148% this year, compared with the 86% run in Tesla, through Wednesday. Virgin Galactic's earnings report didn't help things, with the company saying on Tuesday that more cash than expected was flying out the door and that it generated less than the already-little projected revenue. Virgin Galactic Chairman Chamath Palihapitiya defended the rising stock on CNBC on Wednesday, saying it was a "unique" story that deserved a special valuation. Palihapitiya also said nearly 8,000 people have registered interest with the company to fly to space, which translates into a $2.4 billion revenue pipeline. "In our opinion, the stock is nearly fully discounting a highly successful space tourism business at scale, a moderately successful space tourism business with early credit for the hypersonic opportunity (Phase 3), or a combination of both," wrote Morgan Stanley's Jonas. "At yesterday's close, the stock trades at a P/Sales of roughly 4x our revised 2030 revenue estimate and approximately 8x our 2030 EBITDA forecast." Jonas actually raised his 12-month price target in the downgrade report to $30 from $22. "Though there could be upside to our estimates, we see this as constrained owing to the relatively more limited scalability of the business model — the expected build time of a mature SS2 (SS2-4 and SS2-5) is 24 months and the cost is in the tens of millions," wrote Spingarn. "Thus, with more limited estimate upside (outside of a significant positive pricing surprise or lower costs — both highly uncertain at this stage), further near-term share appreciation from here is dependent largely on incremental multiple expansion, in our view." Spingarn also raised his 12-month price target, taking it to $25 from $15. The stock market's decline this week has not helped sentiment around the stock, which was garnering a lot of interest from younger investors just now getting involved in the longest bull market ever . Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

Chamath Palihapitiya

Olivia Michael | CNBC