DatChat (NASDAQ:DATS) is a private messaging application company with little going for it — aside from the cash it raised at its Aug. 13 initial public offering (IPO). DatChat raised $11.04 million according to its most recent prospectus. Somehow, DATS stock now has a market value of about $220 million, according to Yahoo! Finance.

The problem — at least according to one Seeking Alpha writer— is that the company’s technology, which purports to use blockchain, is nothing special. Apparently, DatChat has not even integrated blockchain technology yet.

But don’t tell that to the market. As of Monday, Oct. 11, DATS stock was at $12.60, up more than 200% from its IPO price of $4.15.

Where This Leaves DatChat

Right now, the company has no revenue. What it does have is cash and warrants, most of which are in the money. In addition to the $11.04 million from its IPO, there are 2.892 million warrants that can be exercised since their strike price is $4.98 per share.

These warrants are all in various stages of being exercised by their holders right now, which provides additional cash to the company. For example, the 10-Q for the period ending June 30 has a section titled, “Exercise of Series A Warrants,” which includes the following note:

“Between August 27, 2021 and September 14, 2021, the Company received aggregate gross proceeds of $2,664,300 from the exercise of 535,000 Series A Warrants, resulting in an aggregate issuance of 535,000 shares of common stock.“

So, as of Sept. 14, the company already had an additional $2.664 million, or $13.7 million total, from the exercise of 535,000 warrants. That still leaves 2.356 million warrants, all in the money, that could potentially provide up to $11.736 million to DatChat. There could also be more warrants, depending on how many units the broker decided to pick up in their greenshoe option.

Therefore, I suspect by Sept. 30 or shortly thereafter, the company had about $25.4 million in cash.

Why DATS Stock Has a High Valuation

The company’s cash balance is nowhere near the valuation of $220 million that DAT stock presently has. In other words, there is nothing between that valuation but air, since the company has no revenue.

The blunt answer is that valuation is being manipulated. Simply put, it is very convenient that the warrants are in the money now. As a result, the company has the ability to raise additional cash.

I highly suspect that once all the warrants are exercised, the stock could easily fall down to its cash per share value, or slightly more than that amount.

In other words, the market value could potentially fall from $220 million to $25.4 million — a drop of 88.5%. This would put the stock at $1.46 per share.

What DATS Stock Is Worth

Let’s assume the company can figure out how to monetize its messaging app. The company has not disclosed how many users it has, and it has no customers. But investors are hopeful. It reminds them of Slack, now owned by Salesforce (NYSE:CRM), and WhatsApp, owned by Facebook (NASDAQ:FB).

According to the Seeking Alpha article mentioned previously, before it was acquired, Slack traded at a forward price-to-sales (P/S) ratio between 17x and 22x. Salesforce acquired it for a P/S value of 29x on 2021 numbers.

But for DatChat, the problem is that the company has no business plan. Here is what page 19 of the 10-Q warns investors:

“We have not developed a strong customer base, and we have not generated sustainable revenue since inception. We cannot assure you that we ever will. We will incur significant losses in launching products and we may not realize sufficient subscriptions or profits in order to sustain our business.”

There are numerous other warnings along these lines. Even the Seeking Alpha writer projects that at most, the company might produce up to $3.675 million in revenue in 2022. Even if we gave this a hypothetical value of 20x revenue, the business would be worth $73.5 million. With DatChat’s $25.4 million in cash, the most optimistic valuation is $100 million.

That is still just 45.5% of its present value, putting the stock at a theoretical valuation of $5.73. This implies a minimum drop of 54.5% from today’s price. That is simply not worthwhile for most investors.

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.