QuantumScape’s Risk Has Dropped, But It Remains High

In recent weeks, QuantumScape (NYSE:QS) has made significant progress, improving the company’s outlook. Still, the valuation of QS stock remains very high, and the company continues to face major risks.

Among these risks, as Morgan Stanley recently pointed out, are tough competition and the possibility that the production of electric vehicle batteries will become commoditized.

Meaningful Progress

On Oct. 27, QuantumScape reported that its “single-layer cells were tested by Mobile Power Solutions, an independent battery lab, and met automotive-relevant conditions.” The company added that, “The test performed on QuantumScape’s cells reflects a complete cycle-life test that demonstrates how well the cell chemistry performs under extended high-performance usage and various commercially relevant conditions for EVs.”

And on Sept. 21, QuantumScape announced that a second Top 10 global automaker besides its current partner, Volkswagen (OTCMKTS:VLKAY), was interested in its batteries. The automaker evaluated QuantumScape’s batteries and has agreed to test them further.

Taken together, these two developments greatly increase my confidence in the company’s outlook. The fact that a third-party tester basically endorsed QuantumScape’s batteries tremendously lowers the risk of the company’s batteries simply not working or having a major problem.

Similarly, the decision by a second major automaker to further evaluate QuantumScape’s batteries after initially testing them initially suggests that they are functional and may have some advantages over existing EV batteries.

Worrisome Risks

Despite QuantumScape’s improved outlook, the company is still facing very tough risks.

On Nov. 16, Morgan Stanley downgraded QS stock to “equal weight” from “overweight.” Among the risks cited by the firm’s well-known analyst, Adam Jonas, are increased competition from other types of battery technologies and increased “‘balkanization’ of the global battery market.”

By “balkanization,” I assume he means that the major automakers may ultimately decide to use EV batteries from many companies. On a positive note, the analyst did say that he views QuantumScape “as a technological leader in solid state.” Jonas has a $40 price target on the shares.

Among the major battery makers with which QuantumScape will have to cope are LG Energy, BYD (OTCMKTS:BYDDF) and Panasonic (OTCMKTS:PCRFY). All three companies are already making many batteries and selling many of them to automakers.

Additionally, StoreDot, an Israeli company that I’ve identified in the past as a threat to QuantumScape, continues to make significant progress. Specifically, StoreDot on Nov. 18 noted that its battery can be charged from zero capacity to 80% capacity in only 10 minutes. Earlier this year, a QuantumScape board members said that solid-state batteries will be able to charge to 80% in 12 minutes. So, it appears that StoreDot may be a bit ahead of QuantumScape when it comes to charging time.

Moreover, StoreDot also announced a new alliance with global manufacturer Group14 Technologies, which makes material used in advanced silicon-carbon anodes. StoreDot says the partnership will allow it to shorten the time to market for its XFC cells and reduce costs.

As I mentioned in a previous column, I have invested in a SPAC, Oxus Acquisition Corp. (NASDAQ:OXUS) that has not yet announced a merger target. There have been rumors that Oxus will merge with StoreDot, and I believe that such a transaction may indeed take place.

Valuation and the Bottom Line on QS Stock

QS stock has a market capitalization of over $12 billion. I believe that, at these levels, the shares are baking in significant market share for the company’s EV batteries.

QuantumScape’s risk, has meaningfully dropped in the last several months. Still, given the remaining challenges and competition that the company is facing, a relatively high chance remains that its ultimate market share will not justify the current price of QS stock.

As a result, I continue to advise investors to sell the shares.

On the date of publication, Larry Ramer held a long position in Oxus Acquisition Corp. 

Larry Ramer 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. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.