Virgin Galactic's monster stock rally in the past few months has taken even bullish Morgan Stanley by surprise, with shares of the company nearing $40.
"A modest correction is overdue, and frankly, healthy, in our opinion," Morgan Stanley analyst Adam Jonas said in a note to investors titled "Even Spaceships Must Return to Earth."
Virgin Galactic slipped 0.2% on Thursday after a day of wild trading.
The space tourism's stock has climbed more than 310% in the past three months. Its rally accelerated recently, notching gains across eight consecutive days of trading.
Virgin Galactic has become Wall Street's favorite speculative play, with shares blowing past the price targets of all three firms that recommend buying the stock. Trading platforms like Fidelity and SoFi told CNBC that Virgin Galactic has become the most popular stock among retail investors, jumping past even Apple and Tesla.
Virgin Galactic "deserves a bit of a breather here," Jonas said, adding that it is difficult "to identify significant thesis changing/accelerating events since the time of our initiation in early December of 2019."
"The stock is trading 70% above our $22 price target with around 60% upside to our $60 bull case," Jonas said.
Morgan Stanley also said some shareholders are calling for Virgin Galactic to raise capital after the stock's run-up. Jonas thinks it will be "a logical question" for investors to ask during the company's fourth-quarter earnings on Tuesday, saying: "Why not raise capital now?"
"While the company has sufficient levels of liquidity to meet the needs of launching its commercial service, investors may nonetheless ask, or even encourage, management to consider adding to the coffers, given unpredictable market conditions," Jonas said.
He also pointed out that a capital raise would help its development of hypersonic long-distance travel capabilities, which Jonas estimated is about a decade away. Virgin Galactic has said it wants to expand its business into hypersonic air travel, using what it learns from flying people to the edge of space to build vehicles that can travel at multiple times the speed of sound.
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