Virgin Galactic recently announced plans for a reverse stock split, causing a negative reaction from investors. The stock saw a significant drop in value following the news, although it has since partially rebounded.
A reverse stock split is the opposite of a regular stock split, where multiple shares are combined into one share with a higher value. This move does not change the overall value of the investor’s ownership in the company, but it can lead to a negative perception among investors.
Virgin Galactic decided to go through with the reverse split to comply with New York Stock Exchange rules, which require stocks to maintain a share price of $1 or more to avoid delisting. By artificially increasing its share price, the company aims to appear more attractive to institutional investors.
However, this decision has raised concerns among investors. The company’s proxy statement revealed that the reverse split could potentially result in significant share dilution, as Virgin Galactic has the authorization to issue a substantial amount of new stock.
With limited cash reserves and high cash burn rate, Virgin Galactic may need to raise additional funds by selling new shares at higher post-reverse split prices. This increases the risk of shareholder dilution, making the stock a potentially risky investment.
Considering these factors, some experts believe that Virgin Galactic stock may not be a wise investment choice at this time.