QuantumScape (NYSE:QS) stock plunged 41% on Jan. 4, highlighting the perils of investing in risky electric vehicle SPAC plays. Shares previously had more than doubled after going public through a reverse merger with an enterprise value of $3.3 billion.
In all, QS stock is down 47% since the beginning of the year.
The general euphoria surrounding the EV space and its innovative business model ensures astronomical returns in the short term. However, investors got burned pretty badly. As the legendary Kenny Rogers famously sang,
You got to know when to hold them, know when to fold them, know when to walk away, and know when to run.
However, even the most astute investor is not a fortune teller and cannot predict when a company makes a move that will devastate the stock price. Is QS stock overvalued? Yes, absolutely. However, the stock market, particularly when it comes to EV stocks, does not function on fundamentals.
Instead, everyone is looking to the future. That’s why Tesla (NASDAQ:TSLA) is racing towards $1 trillion in market capitalization and Elon Musk is the richest man in the world with an estimated net worth of $197 billion. Notwithstanding, I don’t believe QS stock is fundamentally different from where it was before its sell-off.
Considering we are still in the EV bubble, I expect QS stock to move higher. I also believe that the quantum glass battery technology at the heart of its business model is innovative enough for QS stock to be classified as a potential multi-bagger.
QS Stock Isn’t Your Average EV SPAC Play
By this time, no amount of volatility in the EV space should surprise you. We’ve already seen the ambitions of electric truck maker Nikola (NASDAQ:NKLA) go up in smoke after a raft of allegations from short-seller Hindenburg Research. In that case, there were questions raised regarding the efficacy of the company’s product.
Meanwhile, Nio (NYSE:NIO), one of the big EV manufacturers in China, received a $1.4 billion bailout from the government of Hefei, the capital of Anhui province. The net effect is positive; having a healthy relationship with a Chinese administration is beneficial. Yet, for several investors, it is also a sign of weakness.
Where does QS stock fit in all of this? QuantumScape produces solid-state lithium-ion batteries for electric cars. Its early backers include Microsoft (NASDAQ:MSFT) founder Bill Gates and Volkswagen (OTCMKTS:VWAGY). Unlike several car companies that are toying with this concept, QuantumScape is a pure play in the field.
The primary reason why it gained so much steam is quantum glass batteries. Often referred to as the “holy grail,” glass batteries will solve the two most pressing problems keeping electric vehicles from wider adoption – limited battery life and slow charging times. Nobel laureate John Goodenough, co-inventor of the lithium-ion battery, pioneered the concept, which uses a glass electrolyte and lithium or sodium metal electrodes.
QuantumScape is ahead of the curve in terms of research and is singularly focused on this endeavor. Volkswagen invested $300 million in QuantumScape and hopes to deploy its cells in 2025. The German carmaker has the right to buy the first batteries produced. After that, QuantumScape can sell to any buyer.
Not as Risky as You May Think
Considering the recent drop, anyone will be skeptical of investing in QS stock. However, if you invest in the EV space, you are already someone who doesn’t mind a bit of risk. Tesla, the bellwether for the sector, is trading at 202.4x forward price-earnings.
Hence, you can’t really make an argument for any EV stock without concerns regarding overvaluation. When you are buying a company, you invest in the vision. In this respect, QuantumScape ticks all the boxes. It has a novel concept, sound management and an attractive entry point.
As is the case with several stocks, this one can be a multi-bagger, considering the addressable market. Finding the next Tesla has become an ambition for a lot of investors. That’s one of the principal reasons why we are in the middle of an EV SPAC frenzy.
But as the saying goes, “during a gold rush, sell shovels.” EVs are definitely the next big thing. Competition between is only going to get intense from here. Meanwhile, in the battery space, there aren’t as many players.
In conclusion, if you want to invest in the EV space and you don’t mind a bit of risk, QS stock might be right up your alley. However, it’s important to exercise caution. The January plunge in QS stock was triggered by the company filing a Resale S-1 form on Dec. 31.
The market interpreted the filing as the company selling shares to take advantage of its surge in value. Some wondered whether QuantumScape’s institutional investors are looking to sell their stock.
Regardless, none of this had anything to do with fundamentals, a point CEO Jagdeep Singh made. “There has been no change in business. Everything we have discussed with investors remains on track,” Singh said.
Nothing should stop you from initiating a small position in QS stock at this stage.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.