Ian Wyatt is out with a new ad for a “urgent briefing” that will be taking place today about a “secret billionaire investment”… and while the briefing hasn’t happened yet, so we’re not sure what the pitch will be, odds are good that he’s going to keep the “insider shares” secret and dangle a subscription in front of your eyes to get you to pull out your credit card. Probably for his Million Dollar Portfolio, though that’s just a guess, it could be one of his other newsletters.

So I thought we’d dig into this a little bit, to see what we might answer before the sell comes in the “urgent briefing” — and while that means I have to do some guessing, it also feels like a public service — most of us don’t have the patience to sit through these briefings anyway, or have been sucked into too many time share “presentations” on vacation to ever sign up for a seminar again.

So what’s the story? He introduces it with the news of SpaceX’s latest Starlink satellite launch, which is part of Elon Musk’s goal to provide a low-earth orbit network of satellites to provide fast internet service to underserved parts of the globe… and there was indeed a launch a few days ago, the second launch as they try to build this constellation (which will take many years). This is pretty much the same market OneWeb is going after, and Amazon is also in the race, though these are big future bets and no one knows how it will work out (Amazon is still just planning, the others have launched some satellites). There may be early service available in some areas by the end of 2020 from OneWeb (in the Arctic) and SpaceX (probably the southern US), but that seems really ambitious — it’s a long and super-expensive project, and SpaceX says they need 24 launches (they just did their second) to provide a worldwide constellation.

Here’s what Wyatt says on the signup page for the “urgent briefing”:

“Secret “Back Door” for Grabbing Insider Shares in the #1 Space Stock for 2,953% Profits

“Inside the Webinar, You’ll Discover:

• Why this new $23 billion market is taking off right now.
• The top 3 commercial “space stocks” to watch in 2020.
• The secret backdoor for securing your insider shares – for less than $3.50.
• How new space ships will let you fly from NYC to Paris in 21 minutes.”

So that’s not enough to be definitive about any of the three stocks, of course, but I can tell you that I’m quite sure the “secret backdoor” is into Virgin Galactic (SPCE), because that’s the most interesting pure-play “space” stock and it actually does have a “back door” (sort of).

What do I mean? Well, Virgin Galactic went public just a month or so ago, and did so not through a traditional IPO but by merging into a blank check company called Social Capital Hedosophia helmed by venture capital guy Chamath Palihapitiya. Since these blank check companies, called Special Purpose Acquisition Companies (SPACs) essentially always are created with warrants as a way to reward insiders and those who invest to tie up their money while the SPAC looks for an acquisition, there are now five-year warrants on Virgin Galactic.

I hold some of these warrants, since I was a holder of warrants in the SPAC, but they’re also publicly traded — and they have shot up with some enthusiasm since the merger was announced, because it’s pretty rare to get long-term warrants on an exciting-sounding growth story. The ticker will vary for different brokers, but it’s usually at SPCE/WS or SPCE-WT, and it has a strike price of $11.50 and an expiration date of October 25, 2024.

If you’re not familiar with warrants, they’re kind of like call options — holding a warrant gives you the right to buy the stock (“exercise” the warrant) on any day before that expiration date at that strike price. There are often other terms associated with these warrants, sometimes early exercise rights that the company can force if the shares trade above a certain level for a while, I haven’t double-checked recently to see if that’s the case with Virgin Galactic but I think there was a clause in there for an automatic “conversion” of the warrants into equity if the stock trades above $18 (which would reduce the longer-term leveraged returns if the stock goes crazy).

So with the stock at about $9.60 right now after Virgin Galactic reports its results, the warrants at about $2.50 trade at a pretty stiff premium — the stock would have to rise about 45% for the warrants to have any value, and more like 60-70% for the warrants to be a better investment than the common stock (if the stock gets to $16 or so, then the warrant payoff, percentage wise, is better than the equity payoff). So, much like a stock option, you get exposure to shares of Virgin Galactic without risking as much capital, and your returns if the stock doubles are much greater (doubling from here would mean you get a 100% gain in the stock, but roughly a 200% gain in the warrants) — but you are also taking a risk that you’ll lose 100% of your position if the stock stays below $11.50 for the next five years. Leverage works both ways.

I personally think the value of long-term warrants is often discounted by too much, since Wall Street has a hard time putting a price on five years of potential — but this is a high-profile stock, connected to the very promotional Richard Branson and the almost-as-promotional Chamath Palihapitiya (who stayed on as Chair), so the warrants are not cheap and not trading at as big a discount as SPAC warrants sometimes do. Part of that’s just the rarity — it’s almost unheard of to get five-year warrants on a big growth “story” stock, and we can daydream about Virgin Galactic taking its first customers into space in the next year or so and perhaps even being profitable in a few years, driving the shares up by hundreds of percent and making warrant-holders drown in cash, but that $18 redemption right that SPCE has on the warrants would mean that any gains above that level would effectively reset and be the same for equity and warrant holders.

So yes, you can get a “backdoor” into Virgin Galactic, sort of, but it is really just a way to get a little bit of leverage on the stock. Options are trading in SPCE, so if you want shorter-term leverage that’s also available.

As to whether or not Virgin Galactic will surge higher in a few years, well, that’s not going to be a financial story — it will be an emotional one. If investors get excited about buying shares of the first commercial spaceflight operator, which Virgin Galactic seems almost certain to be, and they see the future potential of long-distance flight via space (don’t mock it too much, flying at 40,000 feet once seemed absurd, too, and we all do it today), then maybe the stock will soar. If not, and if the first flights are delayed for a couple years because of a safety concern or they have to raise more money, or if there’s a serious problem with one of their ships, then the stock could easily suffer in the next few years. There are, as usual, no guarantees — but there also aren’t really any other “pure play” space stocks right now, so it seems likely that Virgin Galactic will continue to get a lot of attention.

This is what I wrote to the Irregulars back in July when the Virgin Galactic/Social Capital Hedosophia merger was announced, just for a little background:

Virgin Galactic started as a pretty silly-sounding space tourism idea from Sir Richard Branson 15 years ago, but money and time can build a real company — and it seems that they have pretty good timing in their move to go public, what with the talk about the 50th anniversary of the first Moon landing, but this is still quite definitively a “story stock”. Billionaires have been putting their money into creating tourist space travel opportunities for many years, and this is the first time one of the viable contenders will be publicly traded… though it is not, of course, going to be profitable anytime soon, so this is all about the developing future story and who captures the attention of investors.

And, well, not many people can attract attention like Richard Branson and Social Capital’s Chamath Palihapitiya — so I guess it’s good that they’re going public through a SPAC conversion with Social Capital Hedosophia (IPOA, or IPOAWS for the warrants that I own).

I don’t know how it will work out, but it is a relatively large SPAC (they raised about $700 million), and Palihapitiya is also putting more of his own money in ($100 million) and joining the company as Chairman, so this is not just an “exit” and there will be enough of an influx of cash to be meaningful — if not a lot of IPOA shareholders opt to redeem their shares for cash (a big if), the cash balance will be a good jolt to get them through the next couple years (Palihapitiya thinks they’ll send their first customers to space within a year, be profitable in two years, and achieve “commercial scale” in 2023… all of which sounds somewhat unbelievable).

The stock is large compared to many SPACs, so the consummation of the deal is not likely to create a low-volume crazy-price SPAC spike we’ve seen a few times in the past (KERN and PHUN come to mind), though one never knows. The deal should close late this year, and I’m going to just watch and hold my warrants for now. Five years is a nice long warrant term for a company that could go crazy and get a Tesla-like following, but in the near term I would always consider using my warrant position as a way into a less-risky short if the price goes crazy.

The potential valuation sounds quite rosy for Virgin Galactic, which has had two test flights using the spaceship that they expect to use for consumer space travel (at about $200,000 a head), but they do also seem to be ahead of other consumer-focused space companies, with their FAA commercial license and their existing SpaceShipTwo, along with their licensed location at the New Mexico Spaceport, and they will get a lot of attention as the only one to be publicly traded. They are making four-year projections that, if they come to pass, could conceivably justify the ~$1.5 billion valuation the combined company should have at $10 a share, they say the $1.5 billion valuation is 2.5X their estimated 2023 revenue, and 5.5X 2023 EBITDA.

It is, of course, absurd to put too much weight on that prediction at this point, and both Palihapitiya and Branson have seemed to have a tendency to be almost Musk-ian in their optimism at times — but they have to say something, and 2.5X sales sounds pretty good. (The deposits collected from 600 people for their first flights total $80 million, with total potential revenue of $120 million, so that means they expect to have a lot more people flying beyond those 600 by 2023… if they don’t have other kind of revenue, then they’re saying they’ll get $600 million in spaceflight revenue in 2023, which if their ticket price stays the same, though they say they’d like to cut it dramatically, would mean 3,000 customers are hitting orbit that year… big growth from zero, but this is a new business and I don’t really have a sense of whether or not that’s a laughably huge number.)

The story has not changed dramatically since then, though they did report their first quarter since the merger and update the numbers… none of which are surprising, and none of which are going to mean anything in the next few quarters — now it’s all about getting those first flights into the air, turning those deposits into revenue, and finishing their second spaceship, all of which they expect to happen probably in the second half of next year. The investor presentation on their website provides some good background, and goes into the assumptions they make about unit economics and other forecasts for the next four or five years — so at some point in the next few years, if their projections begin to actually look feasible, then the stock might start trading at a richer premium to go along with the rapid revenue growth (the current forecast has then growing revenue at a rate of over 150% a year from 2020 to 2023, but, of course, current revenue is pretty much zero).

What other “space stocks” might be talked up by Wyatt at lunchtime today? I don’t know, but the two high-profile ones are certainly Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin, both of which are private. The other space stocks are, in the main, also defense stocks — Boeing, Raytheon, General Dynamics, etc., though the one that has always seemed most appealing to me (though I’ve never owned shares) is Aerojet Rocketdyne (AJRD), which makes the engines for a broad array of rockets and missiles. If you’ve got a favorite to share, or an opinion on Virgin Galactic or the rest of this story, please do shout it out with a comment below… thanks for reading!

Disclosure: among the companies listed above, I have long positions (through equity, options and/or warrants) in Virgin Galactic and Amazon. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.