Summary

• Following disappointing Q2/FY2025 results and reduced full-year guidance last month, shares of data storage solutions provider Quantum Corporation have rallied by more than 2,000%.

• Apparently, momentum traders and speculative investors have been chasing the shares as part of the recent quantum computing frenzy.

• However, in contrast to companies like Quantum Computing, D-Wave Quantum, Rigetti Computing and IonQ, Quantum Corporation is NOT a quantum computing play.

• With all the company's outstanding warrants being deeply in the money and persistent debt and liquidity issues, substantial near-term dilution might be in the cards.

• Rather than backing the wrong horse, investors should consider pocketing their outsized gains and moving on.

Vladimir_Timofeev/iStock via Getty Images

Last month, I made some money shorting shares of beleaguered data storage solutions provider Quantum Corporation or “Quantum” (NASDAQ:QMCO) following the company's disappointing Q2/FY2025 report:

Company Press Releases / Regulatory Filings

In the press release, management blamed lower-than-expected revenues and profitability on persistent supply chain issues:

Sales bookings and customer win rates for the quarter were consistent with our overall business expectations as we continued to transform the company. (...)

However, operational headwinds with the supply chain continued this quarter, resulting in exiting the quarter with higher than anticipated backlog.

However, the company's quarterly report on Form 10-Q states lower demand from hyperscale customers as the primary reason for recent revenue declines:

In the six months ended September 30, 2024, product revenue decreased $23.7 million, or 23%, as compared to the same period in fiscal 2024. The primary driver of the decrease was a $20 million decrease in demand from our large hyperscale customers, as well as more general decreases in the overall tape market with declines in media and devices revenue. Outside of the Tape and Hyperscale business, our remaining Secondary and Primary storage systems are also offered as a subscription. We expect the product revenue portion of our Primary and Secondary storage systems to decrease as we continue to transition to subscription-based offerings.

Even worse, substantial cash outflows resulted in the requirement to take on additional debt and negotiate further covenant relief with existing lenders.

As Quantum continues to struggle with the transition from legacy products to state-of-the-art storage solutions, financial results have been underwhelming for quite some time already.

Company Presentation

Recently, the company had to issue an aggregate 1.145 million warrants to lenders in exchange for amendments to its debt facilities.

Adding insult to injury, Quantum lowered full-year projections substantially:

Company Presentation

On the conference call, management stated, “ongoing operational headwinds including transition to a new manufacturing partner” as the reason behind the revised projections.

For my part, I covered my short position at around $3.50 the next day and even left some money on the table as shares continued to decline until the end of the regular session. Subsequently, I removed the stock from my watch list and was perplexed to see shares trading above $70 this morning without any material news having been released by the company recently:

Yahoo Finance

It almost seems like traders and speculative investors have been chasing the stock as part of the recent quantum computing frenzy solely due to its name.

The tiny share count of just 4.8 million shares likely contributed further to the rally.

However, in contrast to companies like Quantum Computing (QUBT), D-Wave Quantum (QBTS), Rigetti Computing (RGTI), and IonQ (IONQ), Quantum Corporation is NOT a quantum computing company and, given its persistent financial challenges, shouldn't be chased on hopes of a near-term turnaround either.

In addition, following the 2,000%+ rally recently, all the company's outstanding warrants are deeply in the money, thus providing an $80 million (!) windfall profit to lenders at prevailing prices. Assuming full exercise, outstanding shares would increase by approximately 25%.

Regulatory Filing

In contrast to many other beneficiaries of the recent buying frenzy, Quantum Corporation has not yet acted on the unexpected opportunity to get its financial house in order. This is likely due to the lack of an active shelf registration with the SEC.

However, I expect the company to file an S-1 registration statement with the SEC in the near future. Once declared effective, Quantum can pursue a secondary offering or enter into an at-the-market offering agreement to reduce debt and replenish its dwindling cash balances.

At least in my opinion, investors should consider pocketing their outsized gains for a number of reasons:

• While the name might suggest otherwise, the company is not a quantum computing play.

• Poor financial results.

• Persistent debt issues.

• Substantial warrant dilution.

• Risk of a near-term capital raise.

At some point, even the most aggressive YOLO investors will realize that they have been backing the wrong horse and move to assumed greener pastures.

Bottom Line

Apparently solely due to the company's somewhat misleading name, shares of beleaguered data storage solutions provider Quantum Corporation have been chased by momentum traders and speculative investors in recent weeks, thus resulting in a 2,000%+ rally.

However, the reality is quite different, as a challenging transition from legacy products to state-of-the-art data storage solutions has resulted in persistent debt and liquidity issues.

While the epic rally has provided the company with an unexpected chance to repair its balance sheet and bolster liquidity, resulting dilution from warrant exercises and a potential secondary offering would almost certainly reverse the current momentum in the shares.

Even more important, the company is not a quantum computing play and at some point going forward, I expect the momentum crowd to take notice of the issue and move on.

Consequently, I am initiating coverage of Quantum Corporation with a “Sell” rating.