Confession time: This is the first time I’ve started a stock-pick story with the question “Is it worth investing in a public company that’s facing a flurry of class action lawsuits?” That’s what I’m up against with solid-state battery maker QuantumScape (NYSE:QS), which makes investing in its QS stock as appealing as licking your finger and sticking it into an EV cell on the verge of overheating.
So here’s the answer to the above question. Ready? Bet you can’t guess. Give up? It’s “No, no, no, no. Nein. Non. Nyet. And: nee (Afrikaans), óchi (Greek), nie (Polish), nahi (Punjabi)…” No, no, no, on and on and on.
Yes, it’s that bad for QuantumScape and the investors who believe in QS stock. The company faces at least three separate suits and possibly more to come. Attorneys accuse senior executives of making misleading statements to investors regarding its solid-state battery technology. They also allege that QuantumScape is “unlikely to be able to scale its technology to the multi-layer cell necessary to power electric vehicles.”
And yet…
QS Stock and Legal Case Caution
Might I remind us all that this case is like any other: innocent until proven guilty. Is there a chance all these lawyers got it wrong and that they’re piling on? Those holding QS stock would love to know. The Seeking Alpha contributor whose Jan. 4 piece brought on the lawyers has even said that QuantumScape’s science “is very good.” In the first sentence, mind you.
But author Brian Morin isn’t just any writer or a peeved investment pundit. He’s the CEO of Soteria Battery Innovation Group. He also serves serves as director and vice president of the National Alliance for Advanced Technology Batteries. Oh, and he holds a a doctorate in materials physics from the Ohio State University.
It’s no stretch to say that Morin’s article bears more than a passing resemblance to expert testimony. And here’s what he had to say that cast a dubious shadow on QuantumScape’s claims. If you were or are considering QS stock, you need to read his piece in full, but at least the excerpt below.
Morin and the Question of Solid-State Sin
Says Morin of QuantumScape:
“Their batteries are small and unproven – not yet as big as an iWatch battery, and never tested outside a lab.” Making such a battery capable of running an EV, then, “is hard – very, very hard. So hard, in fact, that nobody has done it. I’ve read many dozens of research papers where scientists have tried … but then apologize for the lack of a complete working battery, and lay out the significant challenges ahead.”
Now, compare that to the statements made by Kensington Capital Corp., which took QuantumScape public via a reverse merger. Kensington’s Form 425 prospectus, filed with the Securities and Exchange Commission, stated that “Volkswagen has already tested QuantumScape early-stage solid-state battery sample cells in Germany running at automotive rates of power.” It also claimed that QuantumScape has “validated technical, commercial and financial capabilities based upon global automotive standards.”
Huh. Not exactly aligned messages.
An Investment Verdict, Not a Legal One
Without question, my job here is not to pass a legal verdict one way or the other. That’s a job for lawyers and courts to work through. But why would one possibly risk an investment in QS stock when the company has un uphill battle against it, and now a bad image problem to address?
Granted, if wannabe EV maker Nikola (NASDAQ:NKLA) can survive its own 2020 scandal, QuantumScape can survive this — which I must stress is not a confirmed scandal. If it amounts to just misunderstood company communication, or gets resolved via a confidential out-of-court settlement, the company might rocket from some share price bottom it has not yet hit.
But how could I in good conscience recommend QS stock to you? As much as things could get better, they could get much worse. If I read the tea leaves correctly, the company seems to be much less further along in its solid-state battery chase than its official statements would have us believe.
Here’s Your Charge
Steer clear. Please. Other EV makers and companies have done a much better job establishing their credentials and bona fides. Plus, as well documented in Barron’s and other publications, there’s an EV gold rush going on. And with such events come those who will try to peddle fool’s gold.
Is QS stock in that category? Impossible to say. But why take a chance, as the legal battle has just begun? Given the choice with QuantumScape between rev it up and reverse, definitely choose the latter.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.
