QuantumScape (NASDAQ:QS) may sit smack dab in the ultra-hot electric vehicle sector. Even though that shouldn’t turn QS stock into a lightning rod, that is exactly what happened this month.
On Jan. 22, Thornton Law Firm announced it had filed a class-action lawsuit on behalf of QS investors who bought the stock between Nov. 27 and Dec. 31, 2020, citing misleading statements made by senior executives to investors regarding its solid-state battery technology.
If only that were the single, solitary legal action out there. Bernstein Liebhard LLP is also suing QuantumScape, as well as the Klein Law Firm, all the firms making essentially the same allegations over the exact same time period.
The shot across the bow that started it all? A Jan. 4 article in Seeking Alpha, where Brian Morin laid out a case in painstaking scientific detail for why making a solid-state battery “is hard — very, very hard. So hard, in fact, that nobody has done it.”
Now I did go back and forth on the company that funded QuantumScape through a reverse merger, Kensington Capital Corp. Still, Kensington’s Form 425, filed with the Securities and Exchange Commission ahead of QuantumScape going public, set off my Spidey Sense.
“When I peruse an SEC filing with as many charts and hyperbolic language as this one, I immediately get suspicious. Yes, the document serves as a sales pitch of sorts to brief key investors in Kensington Capital stock. But think about that. If I brief such purse-string holders on my progress — let’s suppose I’m selling shares of Lou here — I’m not going to go deep into the pitfalls and significant challenges.”
If I was right, and all these lawyers prevail, those who own QS stock face some frightening propositions. Like: Will anything the lead plaintiffs get from a successful suit make up for what they stand to lose in the meantime? Or: If the charges turn out to be unfounded, do they still point to red flags investors can no longer ignore? Worst of all: What are the chances the company could go down in flames?
What Could Sink QS Stock
Investors will have until March 8 to join the Thortnon suit, which lobs some pretty serious charges against QuantumScape. It alleges that the company violated federal securities laws, specifically through two actions that, if true, will rattle even the staunchest supporters of QS stock.
Thornton contends first that QuantumScape executives “significantly overstated” success related to its solid-state battery power, battery life and energy density. The suit also maintains that “QuantumScape is unlikely to be able to scale its technology to the multi-layer cell necessary to power electric vehicles.”
QuantumScape has claimed its products will increase energy density by 88 percent when compared to lithium-ion batteries and deliver a fast charge of 15 minutes to reach 80% capacity. That appears consistent with what other solid-state battery projects hope to achieve. Morin himself praised the company’s science as “very good.”
But no matter how one slices, dices, spins or reads it, the class action suits are damning stuff. The contentions don’t have to be true to give QuantumScape a black eye. And, as an observer, I take no delight in that whatsoever.
The company claims Bill Gates, the Megalith of Miscrosoft (NASDAQ:MSFT), as a high-profile backer. And if things skew in the right direction, QS stock will catch a sub-sector updraft. Solid-state battery tech is getting a heavy workout at two of Japan’s biggest automakers.
But therein also lies a 15-megawatt problem. If automakers can figure out the solid-state battery puzzle on their own, do they really need an outside company to supply the goods?
Assessing the State of Solid State
Insofar as Toyota (NYSE TM) and Nissan (OTCMKTS:NSANY) are concerned, in-house solid-state will do just fine, thanks.
Both companies have the Japanese government backing them on their respective projects and Toyota could unveil a solid-state EV prototype this year if all goes well. They want this, bad: Toyota does not currently offer a battery-powered vehicle in the United States.
Sure, QuantumScape has an automotive partner, but it’s Volkswagen (OTCMKTS:VWAGY), the eco-deceptive company that brought the world Dieselgate and even bragged back in 2010 that its Golf TDI concept car ran on “Clean Diesel.”
As of June, the Volkswagen emissions scandal cost VW $33.3 billion in fines, penalties, financial settlements and buyback costs. That’s equivalent to three-quarters of what Ford Motor Co. (NYSE:F) is worth. (Its market capitalization is $45 billion.)
For QuantumScape, it’s a very strange and questionable choice of dance partners, if you ask me. Now the German automaker is working with a battery company under a legal cloud. It all raises a hypothetical, hyperbolic question that perhaps is worth asking anyway: Is VW-QuantumScape a case of like attracts like?
Regardless, I think the good people who’ve put their money behind QS stock deserve some answers.
A Quantum Escape Before It’s Too Late
This is the part of the Lou Stock Market Show where I usually dive into the numbers and talk about analyst projections and the like. But to begin with, only one analyst firm follows the company and it calls QS stock underweight. And any rate: Does it really, really matter?
This investment isn’t any better than putting one’s money into disreputable EV maker Nikola (NASDAQ:NKLA), which hasn’t made a working anything either. In fact, it cornered an unusual sector of the EV market: Non-working cars that can coast downhill. So the vehicles didn’t work? No! Of course they did! They worked just fine at fooling the investor types who watched the film and assumed a good ol’ engine powered that there jalopy.
At least Nikola is trying to move on with its unethical founder gone. And with NKLA’s stock price wallowing in mud, there’s an argument that investors can now buy the bottom.
For QuantumScape, though, the troubles appear to be just beginning. Beware: Since Morin’s article and the lawsuits that followed, the stock hasn’t sustained any damage. That’s bound to change.
For never, loyal readers, is it wise to wager on a battery when “guilty as charged” hangs in the balance.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.
