It’s funny how a company can be a market darling one moment, then out of favor a moment later. Electric car-battery developer QuantumScape (NYSE:QS) is a textbook example of this, and lately the selling pressure on QS stock has been intense.
How intense? I’ll put it to you this way. On Jan. 4, QS stock declined by a jaw-dropping 41%. Normally, that would only happen if a company declared bankruptcy or something equally devastating.
Yet, there was no Chapter 11 filing for QuantumScape or anything of that magnitude. Still, as an informed investor, it’s important to investigate a stock when so many traders are dumping their shares all at once.
Along with that, it’s crucial to determine whether the lithium-based battery market is worth investing in. If so, then a stake in QS stock at its now-reduced price could offer a terrific opportunity.
A Closer Look at QS Stock
So, let’s rewind a little bit. Previously, Quantumscape was tradable through shell company Kensington Capital and KCAC stock.
The business combination between Kensington Capital and QuantumScape wasn’t finalized until Nov. 27. Still, the markets tend to be forward-looking. As a result, KCAC stock had already run up from the $10 level to $37 by the time the deal was sealed.
Now trading as QS stock, the shares kept moving on their upward trajectory after the closing of the business combination. By Dec. 21, the stock price reached a 52-week high of $132.73.
That’s a pretty impressive run for a stock that once traded at around $10. But then came Jan. 4 and the 41% share-price crash. It was truly gut-wrenching to witness QS stock touching a short-term low of $47.40 on that fateful day.
As of market close on Jan. 20, QS stock was up slightly to $48.59. So, at least we can say that the stock appears to be headed in a more positive direction.
Nevertheless, an investigation is warranted here. So, let’s take a deeper dive into what appeared to be a terrible, awful, no-good day for QS stock.
Massive Untapped Demand
QuantumScape’s business is to develop next-generation, solid-state lithium batteries, chiefly for electric vehicles (EVs).
As QuantumScape’s slide presentation mentions, the company also has secured a funding commitment from none other than Bill Gates. In all, the total amount of committed capital invested in QS is a whopping $802 million.
There’s certainly a reasonable expectation that the demand for lithium batteries will grow in the coming years. And QuantumScape calculates that over 90 million vehicles produced annually represents upwards of $450 billion of potential battery sales each year. Moreover, QS asserts that there is only 2% market penetration for the types of batteries the company produces.
So, the market for QuantumScape’s solid-state lithium batteries, which charge quickly (just 15 minutes needed to charge to 80%) and offer a relatively low manufacturing cost, should remain quite robust.
What Triggered the Sell-Off
Now, let’s address the elephant in the room. In particular, you might want to know what triggered the 41% single-day decline in QS stock.
Most likely, the sell-off was due to QuantumScape filing a Resale S-1 form on Dec. 31. It’s possible that the market was concerned that the company would sell a large number of QS stock shares, leading to share dilution.
Investors might have also worried that institutional investors were possibly preparing to sell their shares of QS stock.
However, QuantumScape founder Jagdeep Singh offered some words of comfort. “There has been no change in business. Everything we have discussed with investors remains on track,” Singh said.
The company’s founder further added, “The purpose of the Resale S-1 was to permit the resale of shares that were already issued or that may be issued on exercise of options and warrants that were already issued.”
In other words, the fears and speculation over share dilution or massive institutional selling were, hopefully, overblown.
The Bottom Line
So, now we know what prompted the steep sell-off in QS stock. Plus, perhaps we can agree that the share dump may have been an overreaction.
Furthermore, an argument has been made that QuantumScape provides a product in an ever-expanding market. With this in mind, enterprising investors might consider the reduced price in QS stock to be a prime buying opportunity.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.