Virgin Galactic shares to soar 50% as space tourism becomes $3 billion market, UBS says

Published Tue, Sep 8 202011:48 AM EDTUpdated Mon, Oct 26 20205:12 PM EDT

Michael Sheetz @in/michaeljsheetz @thesheetztweetz

(This story is for CNBC PRO subscribers only.) UBS began coverage of Virgin Galactic on Monday with a buy rating, saying it expects the space tourism company's stock to climb more than 50% in the next one year. "We see Virgin Galactic as the only way for consumers to gain entry into the ~560 member astronaut club in the next 5 years. There will be competitors, but the curation of the VG product from marketing to life-long brand connection, in addition to an operating model supporting a uniquely high flight-rate, separates the VG experience from the others," UBS analyst Myles Walton said in a note to investors. UBS also expects that Virgin Galactic's annual sales of tickets for rides to the edge of space will be quadrupling within just a few years of the company beginning commercial services, with a compound annual growth rate of 300% through 2024. Shares of Virgin Galactic rose 9.3% in trading from its previous close of $15.92. So far this year Virgin Galactic's stock is up more than 50%. UBS gave the stock a $25 price target, with Walton saying the firm expects Virgin Galactic will begin flying paying passengers next year. The analyst highlighted that the company's current forecast to begin commercial service is a year delay from the plan Virgin Galactic outlined to investors before going public, as the company now expects to fly founder Sir Richard Branson in the first quarter of 2021 . UBS also noted that Virgin Galactic expects to fly two more test spaceflights before flying Branson, with CNBC reporting on Sunday that the first of those two tests is scheduled for Oct. 22. "Once in commercial operation, we see demand outstripping supply for many years, which should lead to a favorable pricing," Walton said. UBS noted that "it's been just over 50 years since the first human stepped foot on the moon, yet it's now that space travel is on the cusp of becoming accessible as technology becomes more proven and cost per trip falls." The firm expects space tourism to become a $3 billion a year industry by 2030. Spaceflight did not experience the steady growth that commercial aviation did in the decades following the Wright brothers' first flight, with UBS noting that spaceflight now is "is at the equivalent point to barnstormers" near the beginning of aviation history. Virgin Galactic's space tourism business targets high net worth individuals and UBS sees "no shortage in the pipeline of potential customers." UBS surveyed more than 6,000 high net worth individuals, with about 20% of those people saying they are "likely to purchase a ticket on a spacecraft within 1 year" of Virgin Galactic beginning regular flights. That number increases to between more than 35% "after several years of safe operation," UBS said. Even with tickets expected to cost more than $250,000 for the first few years of flights, UBS sees Virgin Galactic's ticket sales reaching a 300% compound annual growth rate by 2024 if the company is flying regularly by the second half of next year. Walton's base forecast for Virgin Galactic is to fly 1,500 passengers in 2024, or about 250 flights of six passengers each. Notably, UBS highlighted how much Virgin Galactic's space tourism market expands as the price comes down. The firm estimated that there are about 1.78 million people with a net worth of more than $10 million but there are about twice that many with a net worth between $5 million and $10 million – and about 37.1 million people with a net worth between $1 million and $5 million. UBS noted that Virgin Galactic is "a major player" in the space tourism market, with Elon Musk's SpaceX and Jeff Bezos' Blue Origin as its nearest competitors. Both of those competitors are "investing pretty aggressively in the opportunity in space," Walton said, although the "huge technological hurdle" in reaching space makes it "nebulous" to predict timelines for multiple companies flying tourists. Supersonic has potential to add value Virgin Galactic is also early in developing an aircraft for supersonic travel , a long-term bet that UBS did not include in its base valuation of the company. So far, Virgin Galactic has partnered with Rolls-Royce and Boeing to build a supersonic jet, while also working with NASA and the FAA on the aircraft's design and certification. "Harnessing supersonic flight to reduce point-to-point of long-haul travel is a 10X larger adjacency that Virgin Galactic is trying to attack with passenger revenue potential of $20B/yr and mfg potential of $10B/yr; though we don't build into either our base case, but could be worth ~$15/sh," Walton said. – CNBC's Michael Bloom contributed to this report. Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

Virgin Galactic's spacecraft Unity flies to its new home in at Spaceport America in New Mexico on Feb. 13, 2020.

Virgin Galactic

(This story is for CNBC PRO subscribers only.)

UBS began coverage of Virgin Galactic on Monday with a buy rating, saying it expects the space tourism company's stock to climb more than 50% in the next one year.

"We see Virgin Galactic as the only way for consumers to gain entry into the ~560 member astronaut club in the next 5 years. There will be competitors, but the curation of the VG product from marketing to life-long brand connection, in addition to an operating model supporting a uniquely high flight-rate, separates the VG experience from the others," UBS analyst Myles Walton said in a note to investors.

UBS also expects that Virgin Galactic's annual sales of tickets for rides to the edge of space will be quadrupling within just a few years of the company beginning commercial services, with a compound annual growth rate of 300% through 2024.

Shares of Virgin Galactic rose 9.3% in trading from its previous close of $15.92. So far this year Virgin Galactic's stock is up more than 50%.