Even compared with other electric-vehicle stocks, QuantumScape (NASDAQ:QS) stock became overvalued for awhile late last year. QuantumScape, which is developing solid-state batteries for EVs, became a publicly traded company when it merged with Kensington Capital, a SPAC (special purpose acquisition company), late last year.
As with other EV firms that merged with SPACs, investors went to town with QS stock. The shares surged from their $10 per share offering price up to nearly $40 per share in the wake of the merger.
But that was just the start of the speculative frenzy. Thanks to continued enthusiasm for EV stocks, along with hype surrounding Apple’s (NASDAQ:AAPL) decision to enter the EV business, the price of QS stock briefly exceeded $130.
However, since then, the exuberance over this EV play has faded tremendously. News of a massive share offering sent the stock down 41% on Jan. 4 alone. After falling massively in recent weeks, Quantumscape’s shares closed on Friday at $43.75. So is the stock worth buying on weakness?
Not so fast. While it’s possible we could see another big rally by EV stocks, the odds are that they won’t surge as much as they did in November and December. And, factoring in the risk of the “EV bubble” fading going forward, QS stock may fall further before it bottoms.
Why QS Stock May Not be Done Falling
After declining sharply in the past month, QuantumScape’s shares could look enticing to some investors. But, while I don’t expect the shares to tumble back to $10, they could head lower in the coming months.
For starters, while QuantumScape’s shares have tumbled, the EV Bubble in general has yet to pop. Electric vehicle makers like Nio (NYSE:NIO) and Tesla (NASDAQ:TSLA) still trade near their all-time highs. Even other EV SPAC names, like Switchback Energy (NYSE:SBE), which will soon merge with EV charger operator ChargePoint, remain near their highs as well.
If (not when) the bubble finally pops, all EV names, including Quantumscape, will likely sell off. While it’s impossible to know when the EV correction will happen, more likely than not it will occur at some point.
The other major risk facing QS stock is that the company’s battery technology could fail to be a game-changer. InvestorPlace contributor Nicolas Chahine discussed this possibility in his recent column about the stock. With its CEO, Jagdeep Singh, appearing more defensive than confident about his company’s chances of success in a recent CNBC interview, the company could fail to live up to its current ambitious growth projections.
Another variable could hurt QS stock in the near-term. That would be the upcoming insider lock-up expiration. Starting in May, company insiders can sell their shares on the open market. That could create more downward pressure on the stock.
However, despite these potential negative catalysts, the shares could still rebound in the near-term.
Potential Positive Catalysts
The sentiment towards QS stock has gotten more bearish since the start of the year. But it’s important to keep in mind that automotive companies have a lot riding on QuantumScape, as shown by the company’s numerous partnership deals. Volkswagen (OTCMKTS:VWAGY) may be its best-known ally.
But Quantumscape also counts Chinese automaker SAIC Motor, along with German auto parts giant Continental AG (OTCMKTS:CTTAY), as its partners. Based on these alliances, Quantumscape has a good chance of changing the game when it comes to EV batteries.
Also important is that the stock’s weakness in recent weeks may be partly due to a lack of positive news from the company. We haven’t seen a bullish press release from QuantumScape since the firm released battery performance data on Dec. 8.
New positive announcements could reinvigorate interest in QS stock. That’s not to say investors should expect the shares to rebound quickly to $130 per share again. But the interest in the stock could jump.
Avoid QS Stock for Now
While I concede there’s potential for QuantumScape to rally once again, the shares looks more likely to head lower in the near-term. Due to the negative factors I outlined earlier, the stock may have more room to fall before it bottoms out.
In the long run, the shares could get back to their high-water mark. But don’t count on a quick rebound by QS stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.