QuantumScape (NYSE:QS), the solid-state lithium-metal battery maker, still looks to be overvalued. This is despite the recent spike and crash of QS stock over the past month.
On Dec. 16, I wrote about QuantumScape’s runup and its likely value of just $40.15 per share. At the time, QS stock was at $62.78 per share, but it is at $53.99 as of Friday, Jan. 15, down 14%.
However, during the past month, the stock shot up more than 100% to $131.67 as of Dec. 22 on speculative fever. But since then QS stock has cratered, now down to below where it was when I wrote that it was overvalued.
In that piece, I wrote that QS 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 more than 4 times in the past two months since then. QS stock is overvalued and I still believe it is worth only $40 at best.
Right now there are no analyst estimates for the company’s revenue or profits growth. The best we have, at least until the company reports its earnings, is its forecast in its presentation.
On page 28 of the presentation, the company projects its revenue will be $14 million in 2024. That is the first year it expects to have sales – two years in the future. That does not make the stock seemingly worth a lot.
Then the forecasts for revenue seem to take off exponentially. By 2026, revenue hits $275 million and by 2027 it spikes exponentially $3.21 billion. In fact, eight years in the future, QuantumScape expects to make $6.439 billion in revenue.
The problem with these giant forecasts is that there is a huge degree of risk and variance associated with how precise they will be in the end. As a result, we need to discount them to bring the future revenue forecast back to present value terms.
If we use a 20% discount rate each year, this helps reduce the value of future revenue taking into variability. The way this works is you take the inverse of 1.20 raised to the power of 8 (for eight years.). This produces a factor below 1.00 that you use to multiply against the far off revenue number.
The factor for 20% over eight years is 23.26%. For example, 1 divided by 1.2 raised to the power of 8 is o.23256. Therefore, the present value of $6.439 billion eight years in the future, using a 20% discount factor, is $1.498 billion.
We can use this to establish the value of QS stock.
Valuing QS Stock
QuantumScape has 447.16 million shares outstanding. That was based on its September 2020 public slide presentation (p.29). Therefore, its market cap is about $24.1 billion.
However, it appears that the company now has $1.155 billion in cash. We deduct this from its market cap to get the enterprise value (EV). That works out to $22.99 billion.
Therefore, QS stock trades for 15 times its 2028 revenue on a present value basis (i.e., $23 billion EV divided by $1.5 billion 2028 revenue). A more appropriate ratio would be 10 times, based on the typical ratio for many electric vehicle stocks.
That means its EV should be $15.347 billion. In addition, we have to add back the cash to get the market value. Therefore, the market value should be $16.5 billion. Compared to its $24.1 billion market value today, QS stock is worth 68.5% of its price.
That means it is worth $37 per share. Note also that I used a 15% discount rate. This results in a higher price than my 2028 calculations using a 20% discount rate.
In fact, if I use a 15% discount rate for 2028 revenue, the factor is just 32.69%. Therefore the present value of the 2028 revenue is $2.1 billion. That implies the market value should be $22.2 billion. This is only 92.1% of the Jan. 15 price, or $49.72.
Therefore the value of QS stock is somewhere between $37 and $49.72. On average this is $43.26, implying a potential drop of $10.63 – or a 20% fall.
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.