Recently, Quantumscape (NYSE:QS) agreed to basically hand over $1.3 billion in free money to Volkswagen (OTCMKTS:VWAGY). How? They granted the German company another 15.22 million shares of QS stock for a second $100 million investment. This was after the QS solid-state lithium metal battery passed some technical hurdles.
As a result, Volkswagen only had to pay about $6.57 per share for this pick of the battery stocks. Based on the Apr. 1 stock price, that makes their total $200 million investment in Quantumscape for 30.44 million shares now worth over $1.5 billion. On Apr. 1, QS stock closed at $49.30 per share.
Like I said, that is essentially a free grant of money to Volkswagen. So, of course the German company was not about to say the technical specs were missed when, after all, they could collect a second $750 million for their latest $100 million. That’s a solid 650% return on investment (ROI) for Volkswagen. Who wouldn’t agree to that?
QS Stock and the Outsized Valuation
My point here is that Quantumscape’s market value has skyrocketed well above expectations because the Volkswagen deal was put together. Part of the reason could be that the company now has much fewer shares outstanding than they originally proposed. For example, on the slide deck of the original pre-merger special purpose acquisition company (SPAC), QS indicated it would have 447.6 million shares outstanding (Page 29).
However, when it closed the merger back in November, there were only some 218 million shares outstanding after the close. That’s according to the prospectus filed with the U.S. Securities and Exchange Commission (SEC) on Mar. 25 (Page 4).
Then on Mar. 26, the company sold another 11.96 million shares at $40 per share. Soon after, on Apr. 1, the company filed another prospectus update saying there were now 306 million shares outstanding and it had picked up another $208.7 million from warrants that holders were exercising at $11.50. I assume this does not include the 11.96 million shares it raised at $40.
Therefore, there are now 333 million shares outstanding, including the 15.22 million Volkswagen shares. That gives Quantumscape a market capitalization of just $16.4 billion based on its Apr. 1 price. Compare this with the original slide deck, which implied there would be 447.6 million shares outstanding. That implied the market value would be $22.07 billion, or almost 35% higher.
My point is that Quantumscape may have miscounted. The 333 million shares outstanding lowers its market value by one-third. That has led to a rise in the stock price.
Moreover, Quantumscape forecast $471 million in cash. But add $208.7 million from warrants and $100 million from Volkswagen to that forecast and the sum is $780 million, about 66% more than foreseen. That puts the enterprise value at just about $15.6 billion.
What to Do with QS Stock
As it stands, the EV-to-sales forecast for 2027 shows that QS stock trades for less than 5 times sales. For example, Quantumscape forecast $3.21 billion in sales by year-end of 2027 in its slide presentation (Page 28). So, $15.6 billion in enterprise value divided by $3.21 billion is a multiple of just 4.85 times.
That is fairly cheap by most standards. Even if we discount the seven-years-out revenue by 15% per year, revenue falls to $1.25 billion (i.e., using a factor of 38.93%). This raises the EV-to-sales multiple to 12.5 times. That is high, but not as much as it used to be.
For comparison, in my previous article on Quantumscape, I estimated that Quantumscape’s 2027 EV-to-sales ratio, on a discounted basis, was 15.3 times. In other words, now the stock is 20% cheaper.
But its valuation is still very high. For instance, the slide deck shows that the company’s peers trade for just 6.9 times EV-to-sales on this year’s forecast numbers (Page 30). And they will be much cheaper seven years out.
What this all boils down to is the fact that Quantumscape has a long way to go. Its own projections show that revenue will only be $39 million by 2025. Somehow, it then spikes to over $3 billion by 2027. But these forecasts are so far in the future that it belies reality.
The bottom line? The market’s valuation of QS stock is unreasonable. It won’t have any revenue to really speak of for five years. So, this is still beyond all reasonable ways of valuing a company.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
