Electric vehicle stocks of all kinds have gone a bit nuts over the past few months. But even in that context, the volatility in QuantumScape (NYSE:QS) stock has been a sight to behold.
In September, QuantumScape decided to go public. Like a lot of young EV companies, it chose the SPAC (special purpose acquisition company) route. QuantumScape agreed to merge with Kensington Capital at a price of $10 per share.
As late as early November, what was then KCAC stock still traded below $13. Then the fun began.
QuantumScape was one of the biggest beneficiaries of the huge post-election rally in electric vehicle stocks. The stock doubled in the last two sessions of November after the merger with Kensington closed. Those gains made little sense: there was little, if any, doubt that the deal would go through, meaning QS stock basically rose 100% on not much more than a technicality.
The stock wasn’t done. Less than two weeks later, QS jumped another 70% in two sessions. On Dec. 22, QuantumScape stock closed at $131.67.
At that level, incredibly, QuantumScape had a market capitalization of $59 billion (based on pro forma shares outstanding from the merger presentation; some public data sources have different and apparently incorrect figures).
The bubble has popped since. In less than a month, QS stock has lost 63% of its value. And while the volatility likely will moderate somewhat, investors should expect that the same kind of up-and-down trading will continue.
What Is QS Stock Worth?
Every investor, no matter his or her style, is trying to buy stocks below fair value.
Of course, to execute that strategy, an investor has to calculate fair value. And the problem for QS stock, like so many of the newer EV plays, is that it’s exceedingly difficult to do so.
Take the broad view. Reasonable investors can have very different opinions about how quickly electric vehicles will be adopted. I generally lean toward the more optimistic side, as I’ve been bullish on the sector for some time now. Government subsidies and, on the commercial side, rising concern among businesses about their environmental footprints, both suggest adoption will rise — potentially in an exponential fashion.
That said, there are skeptics, and they too can be reasonable. Less than 1% of cars on the road at the moment are EVs. Parity in terms of both performance and price hasn’t been totally achieved. Range and charging concerns remain obstacles for a significant number of potential buyers.
Now, take the more narrow view. Bear in mind that QuantumScape is going a dramatically different route than most battery manufacturers. It’s focusing on solid-state batteries.
Solid-state technology is enticing. Solid-state batteries in theory offer higher energy density. That in turn leads to bigger power and faster charges. They’re also far less prone to fires than the lithium-ion batteries currently in use. If QuantumScape can bring solid-state batteries to mass production, the fair value of QS stock almost certainly is higher than the current price of $49 per share.
The Solid-State Question
Of course, that’s a massive ‘if’. Solid-state batteries aren’t new: they’ve been around for decades. But researchers have failed in creating a solid-state battery that can provide its theoretical benefits while remaining reliable.
The core problem has been that solid-state batteries create “dendrites.” These “spiky growths” can lead to short-circuits and battery failure after multiple charges. Huge amounts of capital and labor have gone into solving the dendrite problem. No company has completely solved it yet.
QuantumScape claims that it’s different. Indeed, that’s a key reason why QS stock rallied so significantly last month. On Dec. 8, the company disclosed data that showed its batteries generating “very high rates of power,” leading to an 80% charge in just 15 minutes.
It’s no surprise investors reacted so favorably. But that data doesn’t mean that QuantumScape has solved a 40-year-old problem. The data came from individual cells, not entire batteries. Battery life concerns remain even if power generation over individual cycles is higher. QuantumScape still has a lot to prove.
The Roller-Coaster Will Continue
But here’s the catch with QS stock: it’s going to take a long time for the company to prove its edge, if it ever does. In the meantime, we’re likely to see an awful lot of volatility. More data from the company can further move the stock. Rivals will rise and fall. Optimism toward the sector may start to moderate at some point this year.
Certainly, that doesn’t mean QS again is going to rise 900% in six weeks and then drop 60%-plus in a month. The EV space will settle down. So will the many SPAC mergers of 2020, a number of which have seen their own wild trading. But I’d expect QuantumScape is going to be a popular name with traders for some time.
For investors, that doesn’t necessarily mean the stock is a sell. Indeed, I argued for QuantumScape at $14, before the merger with Kensington closed. And if QuantumScape’s solid-state technology is as groundbreaking as the company claims, $49 will in retrospect look like a steal.
What it does mean, however, is that bulls can’t expect a smooth ride. The roller-coaster might slow down, but the ride is far from over.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.