VG Acquisition Corp (NYSE:VGAC) announced on Feb. 4 it will complete a SPAC merger (special purpose acquisition corp.) with 23andMe, the consumer genetics analysis company. Sadly it looks like VGAC stock might be too speculative for most SPAC investors. My assessment is that it is not worth more than $8.38 per share.
This is mainly because 23andMe is still losing money, with virtually no prospects in the near future of being profitable. This makes it almost impossible to be reasonably positive about 23andMe.
Analyzing the SPAC Deal with Kevin
If you don’t want to wade through the press release and the slide deck presentation, you can take the easy route and watch a YouTube video. One of the best ones on VCAC stock is on the channel Meet Kevin. Kevin Paffrath must be doing something right since his channel has 1.2 million subscribers.
Meet Kevin is a little amusing and makes a few good points describing how 23andMe works. It’s also helpful since he is actually a subscriber to 23andMe’s genetic testing services, which he likes.
However, Kevin points out that 23andMe’s revenue has been declining for the past few years. The company wants us to believe that things are going to turn around going forward. You can see this on pages 32 through 34 of the slide deck.
Moreover, for as far out as the company projects (2024), it will not be profitable. This is based on an adjusted EBITDA basis (earnings before interest, taxes, depreciation, and amortization) basis.
Kevin also astutely points out that there is evidence on Alexa.com that traffic to their site has been increasing. This is an interesting tool you can use to validate a company’s claims about increased online sales.
Kevin points out that 23andMe most likely won’t be very profitable even if their projections are extended to 2025. One of the issues is its huge admin costs and its falling marketing costs over time, even though sales are forecast to rise.
In addition, he doubts that most new customers will sign up for the $29 per year renewal subscription package. This is in addition to paying $99 upfront on a one-time basis. Apparently, 23andme.com is counting on these renewals for a big portion of their future growth.
It all culminates in Kevin’s analysis that the most likely scenario is that VGAC stock trades for about 100 times earnings five years in the future. He says that is too speculative for him and he would rather wait to see if the company can do better after it is public.
What VGAC Stock Is Worth
My analysis is basically similar except that I would point out that VGAC stock now has a $6.543 billion pro forma market capitalization. This is because there will be 444.8 million shares outstanding (see page 37 of the deck).
This also means that its pro forma enterprise value is $5.559 billion, as we deduct the $984 million cash the company will receive at the merger close.
But the problem is that on page 34 of its deck the company projects a negative $78 million in EBITDA in 2024. Sales, if you believe them, will hit $400 million then. Therefore, it trades at 13.9 times 2024 forecast sales.
That would be a high multiple even if it were for next year, much less four years in the future. For example, if we discount that to the present at 15% per annum, 2024 sales are worth just $228.7 million.
That puts it on an adjusted enterprise value-to-sales multiple of 24 times (i.e., $5.559 billion divided by $228.7 million in 2024 sales). This is simply way too high for an unprofitable company.
What to Do With VGAC Stock
At best, I think it is worth half that multiple, or just 12 times 2024 forecast adjusted sales. That gives it an EV of $2.744 billion (i.e., 12 x $228.7 million). Adding back the $984 million in cash puts its target market cap at $3.728 billion. Since there are 444.8 million pro forma shares, the target price should be $8.38.
Whoops — that is well below today’s price of $14.69. That means VGAC stock (its new symbol will be “ME”) is severely overvalued. Don’t wait around for this one to get on track.
On the date of publication, Mark R. Hake does not hold a long or short position in any of the stocks in this article.