Knightscope (KSCP) , an autonomous robot security company, came public last week via an IPO that raised $22 million. This new Nasdaq listing has all the makings of a failing investment and is the type of stock that investors ought to be warned to avoid.
The company relies on individual investors for fresh capital, invested at an absurd valuation, to cover the significant losses Knightscope racks up, making the stock a fully imprudent purchase, in my view. Of course, this could have been said of other money-losing companies that needed the funding of public markets yet eventually became profitable and successful, such as Tesla (TSLA) . But Knightscope doesn't fit that mold, with a dubious business model, unproven management, and opaque accounting. So, investors shouldn't give Knightscope the benefit of the doubt merely because Tesla proved naysayers wrong.
Since it's inception in 2013, Knightscope has been funded by crowdsourced capital raised from small investors to the tune of about $100 million. Investors will likely have to endure many more future dilutive stock sales to fund the company's money-losing operation. Even after the latest offering, the liquidity seems precarious without additional capital raises. In fact, the capital raise was smaller than originally intended. The CEO, now armed with stock currency, also hinted at acquisitions.
Last year, SPACs were a similar type of investment game eventually subjecting the buyers to significant losses. Vast sums of capital vanished when SPACs acquired cash-burning companies at extremely high market capitalizations, with questionable business models and fantastical projections.
Knightscope is currently valued at just under $500 million, with 57 million fully diluted shares outstanding, after swinging wildly post Nasdaq debut from $6 to $27. The IPO prospectus contains scant financial disclosures after the six months ended June 2021, when the company reported a loss of $23 million on $1.8 million in revenue.
At that annual run-rate of revenue and earnings, the stock trades above 120x sales with $46 million in losses. The daily commercials on financial TV are clearly meant to attract potential new investors as well as display its security robots to potential users.
While a fundamental case for this stock can't be made, arguments are sure to surface about potential short squeezes or other tactical reasons to buy the stock. I would caution against following stock promotion based on the reported short interest. Aside from the confusion from data services under-reporting shares outstanding, for every GameStop (GME) short squeeze that works, innumerable other stock pumps leave a trail of bag holders.
As Barron's reported in a cautious column this past weekend, Knightscope's founder and Chief Executive, William Santana Li, had a previous venture building cars designed for police that went bankrupt.
At the company's core is the noble cause of crime-fighting and security. Who wouldn't want to support that? There have been many businesses with ideas to support public safety; Knightscope is not alone in that mission. But successful public companies require viable business models. Knightscope hasn't demonstrated it can achieve success for shareholders, especially those investing at today's unjustifiable market value.
Wall Street has seen a year of futuristic-technology story stocks, from flying taxis to hydrogen fuel transportation, and given them a thumbs down. Money-losing companies with flashy products and rosy projections but little hope of profitability have been where investment dollars go to die. I believe Knightscope has similar hallmarks of an investment loser that should be avoided entirely.