On Sept. 3, Kensington Capital Acquisition Corp (NYSE:KCAC) agreed to merge with an EV battery maker, QuantumScape. However, since the deal was announced when Kensington Capital stock closed at $18.74, it has sunk by 26% to $13.87. But don’t worry. The stock is worth considerably more.
The company is developing next-generation solid-state lithium-metal batteries, as opposed to lithium-ion batteries presently used in electric vehicles.
These are known as solid-state electric batteries. The company has a deal with Volkswagen (OTMKTS:VWAGY) to install its batteries in their cars.
The stock symbol and the warrants will change their symbol to QS and QSW respectively when the merger closes.
A Closer Look at Kensington Capital Stock
Let’s start with the basics. According to the slide presentation, there will be 447.6 million shares outstanding on a pro forma basis when the merger closes. That means that at $13.87 today (Oct. 23) Kensington Capital has a pro forma market capitalization of $6.208 billion.
And since the deal will bring $1.155 billion to the coffers of the combined company, its pro forma enterprise value is $5.053 billion.
Here is why that matters. On page 28 of the slide presentation, the company presents its best forecast of revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization). Its growth is definitely non-linear.
For example, in 2026 it forecasts revenue of $275 million and EBITDA of negative $59 million. But by 2027 its projection goes to $3.21 billion in revenue and $808 million in EBITDA. Revenue by 2028 is $6.439 billion and $1.62 billion in EBITDA.
The problem is those numbers are six to seven years in the future. We have to discount them to the present. For example, using a 15% discount rate, the revenue today forecast for 2027, seven years in the future, is worth 37.59% of $3.21 billion, or $1.2 billion. The 2028 revenue is worth today just 32.69% of $6.439 billion, or $2.1 billion.
Therefore, as Kensington Capital stock has a pro forma enterprise value today of $5.053 billion, its EV-to-revenue multiple is just 4.2 times 2027 (i.e., $5.053 billion divided by $1.2 billion). The ratio for 2028 is just 2.4 times. These are very reasonable and cheap valuations.
For example, if Kensington Capital were to trade at 6 times 2027 revenue, discounted at 15%, the enterprise valuation would move up to $7.217 billion. After adding back $1.155 billion in cash, the market cap would be $8.373 billion. That is 34.9% above today’s market cap or $18.70 per share.
What to Do With Kensington Capital Stock
Anyone interested in buying this stock should read through the well put-together slide presentation. The truth is its solid-state battery technology answers a deep need in the industry.
However, I previously wrote about one criticism about QuantumScape. It does not have Tesla as a client. Tesla is going its own way of developing a solid-state electric battery. I think that is a hurdle for the company.
Tesla is apparently experimenting with using a liquid electrolyte instead of a metal electrolyte, although still using lithium metal as an anode. In other words, Tesla has sort of rejected QuantumScape’s approach. They don’t want to use QuantumScape’s solid-state technology. There is no mention of Tesla at all in QuantumScape’s presentation.
However, QuantumScape is clearly well-liked by Volkswagen. I suspect that the relationship will last a long-time. In fact, they are a natural buyer for the company, in the long run.
So putting this all together, I suspect that the Kensington Capital stock is undervalued by at least 35%. But it may take a while for the market to realize this. For example, it’s possible that it may take a year or two before the market believes that revenue will grow to be substantial by 2027 and 2028.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.