It’s a Bad Time to Buy a Pre-Revenue Stock Like QuantumScape

QuantumScape (NYSE:QS), a development stage company that focuses on the development and commercialization of solid-state lithium-metal batteries for electric vehicles and other applications, is claiming it is building the best battery for electric vehicles. That probably sounds like great news to anyone holding QS stock.

Its solid-state lithium-metal battery technology brings significant enhancements compared to other types of batteries currently used by electric vehicles like “longer range, faster charging and enhanced safety.”

QS stock has lost 59% in 2022. Some might argue that QS stock hitting new lows is a reason to buy the stock. This is risky and unjustified, though. There is no reason why shares of QuantumScape cannot move much lower and make a new 52-week low.

Is it time to buy it? I would say no — I expect the stock to continue to move lower. Here is why.

QS Stock Isn’t a Growth Stock

2022 has been a volatile year for the stock market and for growth stocks. Is QS stock a growth stock? The company is in a pre-revenue stage with zero revenue so far, so if you are focusing on sales growth, the growth is zero.

Analysts expect the company to finally make revenue in 2023 and to at least double its revenue for five years after that.

Many analysts consider QuantumScape a growth stock. I focus on real numbers and not expectations, though. Until commercialization starts in 2024, I do not consider QuantumScape a growth stock.

2022 Is a Bad Year for Speculative Stocks

QuantumScape is a highly speculative stock. Investors believe in the vision of the company to transform the transition to electrification in mobility. However, we are in a bear stock market now, and high-quality stocks, blue-chip stocks and high-dividend stocks are being sold off heavily as inflation fears and the uncertainty about how aggressively the Federal Reserve will raise the interest rates by the end of the year to lower inflation makes investors nervous.

There is a switch to safety, and speculative stocks like QuantumScape are simply out of favor now. You shouldn’t hope for QS stock to be the exception to this trend.

This is one reason its lack of sales is bad news. Speculative stocks are all likely to continue moving lower.

“An Inflection Point” for QS Stock

However, QuantumScape believes that “2022 represents an inflection point in this process, and we believe we have shown that our long-term execution strategy is beginning to yield results.”

The company expects substantial growth in its manufacturing and operational capabilities. To achieve this growth it will need to invest in facility improvements and long-lead equipment. This means higher capital expenditures and a more intense cash burn problem.

Achieving all of that will be harder now that the top manufacturing executive at the company has left, citing “differing management styles.”

Analysts have a median target of $18, which represents a 98% upside potential. I consider this to be very optimistic and disagree with this projection.

Without revenue, QS stock has very few underlying financial metrics. One that it does have is a price-to-book ratio, which is 29% higher than its sector’s median. The stock is neither cheap nor a bargain.

Avoid QS stock. There’s no telling when its price will have finally found a bottom.

On the date of publication, Stavros Georgiadis, CFA  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.