QuantumScape (NYSE:QS) has seen a huge run-up since the shares began trading on Nov. 27 following a SPAC merger. However, I now believe that QuantumScape stock is close to being overvalued.
For example, as of Dec. 11, the stock was at $64.15, giving it a pro forma market capitalization of $28.7 billion. I say that it is a pro forma market cap since the company has not officially revealed the total number of shares it has outstanding.
In my Oct. 28 article on QuantumScape, I wrote that the company will have 447.16 million shares outstanding. That was based on its September 2020 public slide presentation (p.29). When I wrote that article the stock was at $13.87.
In that piece, I wrote that the stock had a pro forma enterprise value (EV) of $5 billion (after deducting $1.155 billion in cash). At the then-$13.87 price, it was trading at just 4 times 2027 revenue. I used a 15% discount rate to bring that revenue to present value.
I figured 4x revenue was too cheap. But now QS is up over 400% in the past two months since then. The stock is, at best, fairly valued. Here’s why.
Valuing QuantumScape Stock
With that Dec. 11 $28.7 billion market cap, QuantumScape stock has a pro forma EV of $27.56 billion. Now we can calculate its forecast 2027 EV-to-Revenue ratio and see if it is high.
For example, on p. 28 of that September presentation, the company projects that its 2027 revenue will be $3.21 billion.
However, we cannot divide $27.56 billion by $3.21 billion to get the EV-to-Revenue multiple. That multiple, 8.58x, does not reflect the risks associated with such a far-off projection.
For example, the truth is we should discount the revenue by 15% to 20%. This would account for the time value of money and/or the opportunity costs of investing money in QuantumScape.
If we do that, the $3.21 revenue forecast for 2027 falls to just $1.2 billion. That implies that the 2027 EV multiple to revenue is now 22.9 times.
Now, to keep the multiple lower we can look at the 2028 forecast revenue. QuantumScape itself projects out that the 2028 revenue will be $6.439 billion. However, when we discount that 15% over the next eight years, it falls down to $2.1 billion in present-value terms.
That puts the stock on a forward EV-to-Revenue multiple of 13.1x. This is seen by dividing $27.56 billion by $2.1 billion that is forecast for 2028 in present value terms.
To put it simply, 13x revenue foreseen eight years in the future is a high valuation. It is probably too high. One thing is certain. QuantumScape stock is no longer the bargain it was when I first wrote about the shares in October.
What To Do With QuantumScape Stock
A more reasonable valuation for the stock would be no more than say 8 times 2028 revenue discounted to the present value. That implies that the pro forma EV would be $16.8 billion (i.e., 8 times $2.1 billion).
However, to calculate its market cap we need to add back in the cash, or $1.155 billion (since we previously deducted it). That brings the market cap to $18 billion.
Next, we divide that number by the pro forma shares, 447.16 million. That results in QuantumScape stock being worth $40.15.
Therefore, QuantumScape stock, at $64.15 as of Dec. 11, is still too high by $20.00, or 33%. It makes no sense to buy the stock at its present valuation.
I am not the only one with this analysis. For example, TipRanks reports that the average price target is $28.00. That represents a decline of over 56% from that Dec. 11 price. However, that is from just one analyst. There is not a lot of sell-side research on this EV battery maker.
The problem is this company’s valuation is simply too high. The 2028 projection of revenue has a lot of risk. Wait for a chance to buy QuantumScape stock at a lower price, if you can.
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.