Meta Materials (NASDAQ:MMAT), a Canadian company that develops nanocomposite materials and products, just closed on its first major acquisition in the nanotech field. The good news is that this acquisition will bring in much more revenue than the measly $624,000 Meta Materials made in its second quarter. The bad news is that the highly inflated market capitalization for MMAT stock reflects all the upside for the company.
For example, at $5.30 as of Oct. 8, the stock now has an unreal market capitalization of $1.469 billion according to Yahoo! Finance, which uses Refinitiv data to calculate the valuation. This market cap is more than preposterous.
Moreover, the stock has been rising in the past two months since it bottomed out on Aug. 20 at $2.88.
Meta Materials’ Nanotech Security Acquisition
First of all, Meta Materials no longer has $154.6 million in cash on its balance sheet, as it did at the end of Q2. According to a press release issued on Oct. 5, Meta Materials paid 90.9 million CAD for 100% of the shares of Nanotech Security. This is a high-tech company that does nanoimprint lithography, mostly for governments that want to incorporate security features in their banknotes and currency.
Moreover, in the accompanying 8-K filing with the Securities and Exchange Commission (SEC), Meta Materials indicated that in total, it spent an aggregate cash consideration of approximately $72.2 million. Therefore, now Meta Materials has just $82.4 million in cash in the bank, and actually probably less than that.
The reason is that the company probably spent at least 5% on the acquisition costs with lawyers and accounting fees. Additionally, it’s not clear that the Nanotech Security convertible debt and any other debt on Nanotech’s balance sheet has been paid off with the $72.2 million outlay.
Finally, Meta Materials burnt through $5.6 million in negative operating cash flow, as seen in its cash flow statement for the first six months of 2021. On top of that, $3.04 million in capital expenditure spending during the period brought its free cash flow to a loss of $8.64 million, or about $4.3 million in the last quarter. Even if the company had breakeven cash flow, its capital spending alone in Q3 would be at least $1.5 million.
So, by the end of Q3, Meta Materials’ cash balance is probably down another $7.1 million on top of the $72.2 million spent on Nanotech Security. This is from $3.6 million in closing costs, $2 million in negative operating cash flow and $1.5 million in capex spending. That brings its estimated cash balance down to just $75 million.
Where This Leaves MMAT Stock
Nanotech Security made just 2.6 million CAD in revenue in its latest fiscal quarter ending June 30. That converts into about $2.09 million in U.S. dollars, or about $8.4 million annually. Therefore, it appears Meta Materials paid $72.2 million for $8.4 million in revenue, or 8.6 times sales.
So, now we have a combined company with potentially $8.6 million in sales and $2.4 million in its own sales. That works out to $11 million in sales, along with $75 million in cash.
Can someone tell me how that adds up to a $1.469 billion market value for MMAT stock? Am I missing something here?
In fact, let’s just assume that somehow sales can even triple in the next two years to $33 million. That still means that Meta Materials trades for 44.5 times potentially tripled sales.
This is beyond ridiculous. As a result, it appears MMAT stock is a highly speculative security. Its valuation makes no sense whatsoever. Why should anyone pay nearly 45 times the revenue (at triple its present run rate) based the existing valuation for MMAT stock?
Therefore, most investors should wait for the stock to fall to a more reasonable level. For example, at 5 times the triple revenue rate of $33 million — or $165 million — plus $75 million in cash, the target valuation is no more than $240 million. This is 16.34% of today’s market value, or just 87 cents per share. It may well take some time for MMAT stock to fall to this level, but that is all it is worth now.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.