Virgin Galactic's Reverse Split Triggers Investor Panic
Why Investors Had a Meltdown Over Virgin Galactic's Reverse Split News
Virgin Galactic is now officially a penny stock -- but it has a fix for that. Call it a "dilution solution." On Friday, April 19, Virgin Galactic (NYSE: SPCE) told investors that it was planning to conduct a reverse split of its stock, potentially reducing every 20 shares of space stock they owned (or 15, 10, 5, or just 2) to just one single, solitary share.
What is a reverse stock split?
Let's start with the headline announcement: The reverse stock split itself. As the name suggests, a reverse split is the opposite of an ordinary stock split. Whereas in an ordinary split, a single share costing, say, $20 might be divided into 20 shares each costing $1, in a reverse split the reverse happens. Twenty shares that each cost $1 are effectively glued together into one mega-share costing $20.
Why do companies reverse split?
Now, Virgin Galactic probably anticipated this reaction, yet it did it anyway. Why? Because it kind of had to.
Virgin Galactic's other bad news
You can look at this decision in one of two ways. Viewed most charitably, splitting the stock is the simplest solution to avoiding the stock getting delisted from the NYSE -- which would make it harder to trade, and hurt the value of the penny stock even more. It's a way to protect shareholder interests.
Virgin Galactic currently has only $382 million left in the bank, net of debt. It's burning cash at the rate of $492 million per year, and will be in a net debt position before the year is out -- yet still needs to spend tens or hundreds of millions of dollars building its planned fleet of Delta spaceplanes and motherships to launch them. The likelihood that Virgin Galactic will soon use its authorization to raise the cash it needs by selling new shares -- at new and improved post-reverse split prices -- I suspect, is near 100%.
Is Virgin Galactic stock a sell?
Investors should not discount this risk.
- Overview of Virgin Galactic's reverse stock split announcement and its impact on investors
- Explanation of reverse stock splits and why companies choose to implement them
- Analysis of Virgin Galactic's decision and potential risks for investors
- Assessment of the future prospects and risks associated with investing in Virgin Galactic
This article was prepared using information from open sources in accordance with the principles of Ethical Policy. The editorial team is not responsible for absolute accuracy, as it relies on data from the sources referenced.