Virgin Galactic investors just got some bad news. They should expect more.
Two months ago, Virgin Galactic (SPCE -14.25%) stock crashed after the company told investors it planned a reverse stock split after holding its June 12 shareholders meeting.
It’s June 13 today, and Virgin Galactic has gone ahead with its plan. Last night after close of trading, management confirmed it will reverse split its stock 1-for-20. As of 12:15 p.m. ET today, Virgin Galactic stock is down 13.7%.
Virgin Galactic’s great big reverse split
The opposite of an ordinary stock split (where one share becomes several shares), Virgin Galactic’s reverse share split will glue together 20 current shares into one single share — starting right after close of trading on Friday. By the time investors wake up Monday, for every 1,000 shares of stock they thought they owned, they’ll discover they actually own only 50.
On the plus side, each of those 50 shares will be worth more. Virgin shares currently cost $0.74 apiece. The price Monday morning should be closer to $14.80.
Is Virgin Galactic stock a sell?
Believe it or not, that’s actually (kind of) good news. At $0.74 per share, Virgin Galactic stock is a penny stock. As such, it’s in violation of New York Stock Exchange rules requiring stocks to maintain a price of more than $1 per share, or be delisted. Post-split, this threat will go away — unless the stock falls further.
That’s the big risk for Virgin Galactic investors. Having just retired its Unity spaceplane from service, Virgin Galactic is entering a two-year period in which it will have no spaceplanes flying, and no way to generate revenue. The company is almost certain to sell shares to keep itself solvent while it builds a replacement Delta spaceplane — and indeed, has plans to sell up to $400 million worth of shares to raise new cash. Thus Virgin Galactic investors who just saw their shares shrink 20x will soon face the prospect of a double whammy — fewer shares and more share dilution to boot.
Call me a pessimist, but I think it’s probably time to sell.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.