With great fanfare, VG Acquisition (NASDAQ:VGAC) announced on Feb. 4 that it was merging with consumer DNA testing company 23andMe in a combination valued at $3.5 billion. VGAC stock gained more than 30% on the news.
Now the bloom’s fallen off the rose, with VG Acquisition’s stock losing 40% of its value.
Nearing single digits, is VG Acquisition a buy?
VGAC Stock Versus Virgin Galactic
In mid-February, I suggested that Richard Branson’s space company, Virgin Galactic (NYSE:SPCE), had come too far too fast, gaining 130% in six weeks of trading. As a result, I argued that VG was a better risk-adjusted buy.
I wasn’t getting off the space bandwagon, just giving it a little break. Since then, VG is down 25%, while Virgin Galactic is off by more than 40%. While feeling somewhat vindicated by my assessment of Virgin Galactic, I’m a little perplexed about VG’s correction.
InvestorPlace columnist Larry Ramer had some tough love for 23andMe in late February, suggesting that its DNA testing for consumers isn’t all that it’s cracked up to be. Add to this the fact that the sector’s barriers to entry are minimal, and you have a stock that’s seriously overvalued.
To further his case, Ramer points out that InvestorPlace contributor Mark Hake believes 23andMe has a pro-forma enterprise value of $5.56 billion, or $8.38 a share, considerably lower than VG’s $10.50 share price this afternoon.
Ramer believes investors should avoid it. Hake says it’s “too speculative.”
I don’t think there’s any question that VG is speculative in nature. Any time a company is losing money and isn’t expected to be profitable for another three or four years, its shares are very risky.
But for investors who understand that and can afford to lose 100% of their capital, the fact that it generated $305 million of revenue in 2020 puts its miles ahead of many of the SPAC targets that have announced merger deals in recent months.
Back to the Valuation
Assuming none of VG Acquisition’s shareholders exercise their redemption rights, 23andMe will have $984 million in cash at its disposal in the wake of the merger. Including public and private warrants (convertible into 25.1 million shares) and the 3.8 million sponsor shares that vest at $12.50 and $15, there are 473.7 million shares of the company outstanding.
That’s $2.08 per share in cash. At $10.50, VGAC stock is currently trading at five times its cash. Meanwhile, Branson’s sister company, Virgin Galactic, trades at 9.6 times its cash (based on $665.9 million of cash, 236.9 million shares outstanding, and a share price of $27).
VG is trading for nearly 50% less on a price–cash basis.
Another way of looking at this is to back out 23andMe’s $2.08 in cash from its pro-forma balance sheet. That means investors are paying $8.42 per share ($10.60 minus $2.08) or 13 times sales ($8.42 times 473.7 million shares divided by $305 million in sales) for the shares.
If you look at some of the best-performing SPACs of 2020 that have already merged, you’ll see that their price-sales ratios vary. Trading at 13 times sales (not including cash), 23andMe is somewhere in the middle of the pack.
Again, I must reiterate that 23andMe’s legitimate sales figures, as opposed to the wild projections of firms that have agreed to merge with SPACs, ought to provide speculative investor with some comfort.
The Bottom Line
If you asked me which SPAC I would buy if I only had one choice, I wouldn’t say VG Acquisition.
However, if someone bet me $1,000 that VGAC stock wouldn’t trade above $20 over the next 12 months and gave me 2:1 odds, I might take that bet.
Most investors, I believe, are putting too much emphasis on 123andMe’s direct-to-consumer genetic testing business and not enough on its plan to use its database of more than 10 million genotyped customers (that number is expected to grow to 16.4 million by 2024) to help create new drug therapies and novel-consumer products.
The possibilities are endless.
It’s got some warts, I’ll grant you, but if its share price drops below $10, speculative investors ought to consider betting on it.
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.
