Beware the Quantum Leap: Why It’s Time to Go Short on QS Stock
Here’s some eye-popping math for you. From its July 26 closing price of $9.38 to its final price of $13.27 on July 28, QuantumScape (NYSE:QS) stock rallied approximately 41.5%. Today, I’m going to recommend that QuantumScape’s investors got lucky and should strongly consider taking profits.
There may be even a short-selling opportunity here. That’s how irrational and overdone the two-day share-price pump was, in my humble opinion.
Granted, my previous advice to sell QS stock before July 26 was 100% wrong. Or at least, it was wrong in the short term, but now I’m prepared to double down on my bearish call as QuantumScape’s future prospects certainly aren’t 41.5% better than they were before the rally.
QuantumScape: Still Spending Millions but No Profits
QuantumScape publishes significant updates at a frustratingly slow pace. So, when the company does provide an update, it’s a big deal and the impact tends to be highly magnified.
Thus, news-hungry investors feasted on QuantumScape’s second-quarter 2023 shareholder letter. I have a funny feeling that this will be the company’s last update for a while, so the company’s investors should read it carefully.
From a financial standpoint, QuantumScape reminded us that it knows how to spend money quickly. The company projects full-year 2023 capital expenditures (capex) of $100 million to $150 million and cash operating expenses of $225 million to $275 million.
Meanwhile, QuantumScape still has no revenue or profits. Also, the company expects that its “cash runway” will “extend into the second half of 2025.” In other words, QuantumScape could run out of cash in two years.
Why QS Stock Rallied More Than 40%
I’ll admit, I was baffled by the wild short-term rally in QS stock. The company reported zero second-quarter sales and a per-share earnings loss of 26 cents, which is worse than Wall Street’s consensus call for a per-share loss of 20 cents.
Apparently, the share-price rally was based not on any actual sales, but on the prospect of a sale. The key statement in QuantumScape’s quarterly press release was: “We are already working closely with a prospective launch customer in the automotive sector for this cell,” referring to the QSE-5 model electric vehicle (EV) battery cell.
It looks like the market hyper-focused on the word “customer,” which suggests revenue. In contrast, I’m focused on the word “prospective,” which implies hope and uncertainty.
Anyone buying QS stock now had better pray that QuantumScape’s “prospective” deal with a customer doesn’t fall through. Deals fail all the time, and as the old market saying goes: buy the rumor (or the hope of a “prospective” deal), and sell the news.
The Rules for Short-Selling QS Stock
Most people should simply refrain from investing in QuantumScape. Or, take profits now if they have any, and consider themselves extremely lucky.
If you’re audacious enough to short-sell QS stock, be sure to follow some rules. Only short a very small number of shares. Have an exit strategy (such as using a stop-loss or purchasing call options) in case the stock goes higher.
Finally, don’t even think about shorting QS stock unless you have a large account with plenty of cash in it. Under those conditions, short-sellers could have an interesting opportunity now that the market is irrationally exuberant about QuantumScape.
On the date of publication, David Moadel 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.
