Did you buy QuantumScape (NYSE:QS), the Bill Gates-backed developer of a next-generation solid-state lithium-metal battery at the beginning of 2021? If so, your QS stock is sitting on a 47.3% loss year-to-date through Feb. 10.
Switching gears, most investors have heard by now the story of the case of mistaken identity involving Elon Musk’s appearance on Clubhouse, the privately-owned invite-only social media app.
When the news got out that the billionaire was joining the platform on Jan. 31, some investors went out and bought shares of Clubhouse Media Group (OTCMKTS:CMGR), a company that provides content creation services for social media. CMGR stock gained more than 117% on the news.
However, once investors realized the error of their ways, Clubhouse Media stock fell back to $5. Interestingly, CMGR stock has since risen once more to $13 on a possible short squeeze.
Investors waste millions of dollars each year on precisely this kind of mixup.
Back to QuantumScape.
If you mistakenly bought Quantum Corp. (NASDAQ:QMCO) at the beginning of 2021, thinking it was the battery startup, you would have a YTD return of 38.7%, 182% better than Bill Gates’ baby on a relative basis.
Heading into the second half of February, should these mistaken investors sell QMCO and buy QS stock? Or should they let their unexpected gift run its course?
Here are my thoughts on both questions.
Investors Should Get into QS Stock
Investing is difficult enough without trying to benefit from a lucky break. If you felt at the end of the year that the long-term potential of QuantumScape was worth paying almost $85, you must believe it’s worth paying $45 approximately six weeks later.
As I write this, QuantumScape has a market capitalization of $16.4 billion, according to Morningstar. At the end of 2020, it was approximately $31 billion. I’ve based this on 364.4 million shares outstanding ($16.4 billion market cap divided by $45).
Using his figure — he’s a top-notch Chartered Financial Analyst — we get a Feb. 10 market cap of $20.1 billion and a Dec. 31, 2021, value of $38.0 billion.
However, page four of the company’s Dec. 23 amendment to its S-1 says 415.7 million shares are outstanding, including the exercise of all outstanding warrants. Considering Mark came up with the 447.6-million number well before the dust settled, it’s pretty darn accurate.
So, based on projected 2027 and 2028 revenue of $3.2 billion and $6.4 billion, we’re talking about a current price-to-sales ratio of 5.8x for 2027 ($18.7 billion market cap) and 2.9x for 2028.
Using a Dec. 31, 2020, market cap of $35.3 billion ($85 share price), the 2027 and 2028 P/S would be 11.0x and 5.5x, respectively.
When QuantumScape was trading around $12.5o in November, it was a lot easier to recommend investors jump on the bandwagon. Trading for almost four times the value just three months later, it’s a lot harder to do the same.
On Feb. 5, Hake stood by his $43.26 per share fair value assessment of QuantumScape.
With markets getting somewhat frothy, I’d be inclined to wait and see if you can’t get a better entry point in the high $30s.
What to Do With QMCO?
First off, it helps if you actually know what Quantum does to make a buck.
According to its website, “Quantum’s technology, solutions, and services help customers capture, create, and share digital content — and preserve and protect it for decades.”
A positive aspect of the company is that it has five decent-sized revenue streams: Service Revenue (33% of 2020 revenue of $402.9 million), Secondary Storage Systems (28%), Primary Storage Systems (19%), Devices and Media (15%), and Royalty Revenue (5%).
I won’t get into what each category is all about. Suffice to say; it’s got diversified revenues.
The downside is that revenues were $479.8 million in 2016; they were 16% lower in fiscal 2020 (March 31, 2020, year-end). But even that has a silver lining because, in 2020, it generated a $21.2 million operating profit, its highest in the past five years.
Through the first nine months of fiscal 2021, both sales and operating profits are considerably lower than last year. It expects an okay fourth quarter to finish its fiscal year.
If you sell at this point, the capital gain will be taxed as ordinary income at your personal income tax rate. To avoid that, you’d have to hold QMCO until the end of the year.
I don’t think there’s enough meat on this bone to let your unintended profits ride.
What I would do is put aside the after-tax gains and wait for a better entry point on QuantumScape. This one’s in the first inning of an extra-innings slugfest.
Your patience should be rewarded.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.