Caution and Patience Are Needed for QuantumScape


QuantumScape (NYSE:QS), which is the developer of next generation batteries for electric vehicles, announced a merger with a SPAC (special purpose acquisition company) back in early September. And yes, the timing was spot-on for QS stock.

The entrance to QuantumScape Headquarters QS stock
Source: Tada Images /

There would be a major rally in the EV space, led by the mighty Tesla (NASDAQ:TSLA). There would also be the positive impact of novel coronavirus vaccines from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA).

As a result, QS stock would soar to a high of $132 by December. This was the case despite the fact the company had zero revenue and would not likely commercialize its technologies until a few years.

But since then, QS stock has calmed down. And the selling as accelerated as the markets have come under pressure lately, especially with hot growth companies. There has been a major rotation in the markets.

Keep in mind that QS stock is now trading around $45. Although, the market capitalization is still a hefty $16 billion.

Then what can we expect now? Might it be time to buy QS stock on the dip? Let’s take a look.

Background on the Company

Back in 2010, tech entrepreneur Jagdeep Singh and Stanford professor Fritz Prinz founded QuantumScape. The focus was on the development solid-state lithium-ion batteries, which are generally cheaper, and have faster charging and higher performance versus traditional batteries.

Yet the technology is complex and temperamental. One of the biggest problems is dentrites, which create cracks on batteries. This can cause deterioration and over-heating. But QuantumScape has found innovative approaches to deal with this.

As a testament to the company’s innovations, it has been able to forge a strategic relationship Volkswagen (OTCMKTS:VWAGY), which involved an investment of $300 million. There have been other notable investors that have taken large stakes as well, such as Microsoft’s (NASDAQ:MSFT) co-founder, Bill Gates.

Something else to consider: Late last year, QuantumScape announced encouraging data about its single-layer battery cell. Then in February, the company announced positive results for its four-layer platform. By the end of the year, QuantumScape hopes to have a 10-layer cell. If this turns out to be a success, it will be a strong indication that the technology will be useful for EVs at scale.

Note that QuantumScape has been aggressive in protecting its valuable intellectual property. There are currently 80 issued patents and 40 are pending.

However, despite the advantages, there are considerable risk factors for QS stock, too. First of all, there has been a surge in investments for battery technologies during the past few years. So it is far from clear if QuantumScape will ultimately become the winner in the market.

Next, there will likely be challenges to ramp up production and get widespread distribution. This is always a challenge with any new type of technology, especially one that is looking to unseat systems that have been around for decades.

Bottom Line on QS Stock

The market opportunity for QuantumScape is enormous. According to Baird analyst Ben Kallo, it is estimated at a staggering $1 trillion by 2040. And as for the current market size, it is about $23 billion – and the segment is seeing strong growth. And as for QuantumScape, it estimates that its own revenues could reach $6.4 billion by 2028.

As for Wall Street analysts, they remain fairly bullish. The target stock price is $56, which assumes 29% upside from current levels (this is according to TipRanks).

But despite this, I still think investors should be cautious – at least in the near term. QS stock has proven to be quite volatile and this could easily continue. For example, when the company announced the issuance of 10.4 million shares, the stock got hit hard. It’s an indication that the stock price is highly sensitive.

Thus, for investors now, patience could be the best approach – that is, to wait until the markets get more stabilized.

On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling.  He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.

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