Investors Should Not Gamble on QuantumScape Shares
With the outlook of QuantumScape’s (NYSE:QS) batteries becoming more uncertain and risky, I recommend that investors sell QS stock. At their current levels, the shares have a negative risk-reward ratio.
The company is developing solid-state batteries for use in electric vehicles. Currently, most EVs use lithium-ion batteries.
In the last few weeks, an outside expert and QuantumScape’s own CEO have made cautious comments about the company’s technology. Consequently, I’m more bearish about the name than when I previously wrote about it in September.
In a Jan. 4 column, Seeking Alpha columnist Brian Morin, the CEO of Soteria Battery Innovation Group, wrote that QuantumScape’s batteries are “small but unproven” and “never tested outside a lab.”
He added that the company will have great difficulty creating a solid-state battery for use in the “real world,” noting that the feat has never been accomplished. And ominously, Morin contended that QuantumScape’s battery “will only last for … about 75,000 miles of aggressive driving,” while there’s no evidence that its energy density will be higher when it’s released than that of competing batteries.
Indicating that Morin has some credibility, Wall Street seems to have taken his comments very seriously. QS stock tumbled by about 40% to $49.96 on the day his column was published. Trading at about $54.50 on the morning of Jan. 14, the shares had not recovered most of their losses 10 days later.
And in a Jan. 4 interview on CNBC, QuantumScape CEO Jagdeep Singh made some comments of his own that did not sound very bullish.
Singh said, “If we can get this [battery] to market, we actually believe we can get a very big share of the market. If we do that, investors will be well taken care of.” At another point, the CEO stated, “If we can deliver this technology into real cars on real roads, we will create a tremendous amount of value for all of our investors while at the same time making a real impact on the climate.”
In other words, Singh was admitting that QuantumScape is facing meaningful risks. And that the company will not definitely have “clear sailing” going forward.
A Skeptical Analyst and Valuation
As of November, Bernstein analyst Mark Newman had a “sell” rating on QS stock. Warning that “there are several significant barriers to commercialization” of QuantumScape’s batteries, Newman added that there’s not much data on the length of time they will function, according to Barron’s. And the publication noted that Quantumscape “isn’t expected to generate significant sales until 2027.”
Newman has a $28 price target on QS stock, which was trading around $54.60 on Jan. 14.
Even though the shares are trading over 50% below their 52-week high of $132, they still have a huge market capitalization of around $20 billion.
That’s an extremely high valuation. This is especially relevant since Morin, the columnist who seems to know a great deal about batteries, is skeptical about the company’s product. Also, QuantumScape’s CEO is subtly warning that the company’s batteries may not work.
The Bottom Line on QS Stock
Those who buy and/or hold QS stock at this point are betting that Morin’s doubts about QuantumScape’s battery will be proven wrong. They also are ignoring Singh’s admonition that its batteries may not prove to be viable. And in light of the stock’s valuation, if the battery doesn’t work very well, the owners of QS stock are likely to lose the vast majority of their investments.
Further, as I pointed out in my prior column on QuantumScape, new technology that looks very promising often falls flat on its face.
In light of these points, buying and/or holding QS stock now reminds me of purchasing shares in a gold-prospecting company in the mid-19th century. You might strike it rich or you could lose your shirt. In other words, it seems like more of a gamble than an investment.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.