Quantumscape (NYSE:QS) stock has been subject to recent selling pressure for multiple reasons. For one, there’s a building critical mass of sentiment that the electric vehicle (EV) “bubble” is going to burst. Perhaps that is or isn’t true, but at the least the bubble is certainly deflating. QS stock examples that.
So do industry bellwethers like Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO), which have dropped pretty precipitously in the past month and a half. Quantumscape was subject to that same downward pressure as an EV industry supplier.
Further, investors weren’t impressed by the company’s recent stock offering, due to dilution concerns.
And lastly, QS has one giant built-in implication that it has benefited mightily from. Headlines seem to imply that the company is the only player in its niche, facing no competition. But who knows how long that will last.
QS Stock: Bubble Concerns Persist
This doesn’t bear much more explanation. As we all know, 2020 was a massively successful year for EV companies. Leaders in the industry cemented their positions as forces in the car manufacturing landscape for the coming decades. EVs are here. Electric vehicle stocks were hot through 2020 and have continued to be hot into 2021.
However, early March marked a turning point. Of course, though, Quantumscape didn’t walk downward in lockstep with Tesla and Nio. It was (and is) simply implicated in the broader EV bubble narrative.
Instead, QS stock faced its most recent trouble after seeking additional capital.
The Markets Reacted Sharply
On Mar. 22, Quantumscape announced a proposed offering of 13 million shares of common stock. A market selloff immediately ensued. Shares of QS stock dropped from a Mar. 22 close of $64.29 to a market close of $47.83 just two days later.
Of course, Quantumscape had said it intended to use the proceeds to expand a jointly built production line with Volkswagen (OTCMKTS:VWAGY). The company elaborated that it needed the capital to cover its equity contribution. That implied the expansion couldn’t have been anticipated and so required an additional raise.
Nevertheless, the markets reacted to punish the company and the selloff still occurred. Fledgling companies like Quantumscape require lots of capital to fund their ambitious growth strategies. So, when markets punish equity offerings in upstart companies — like what happened here — it’s a bad sign.
Basically, investors are tacitly saying that Quantumscape should have enough capital following its special purpose acquisition company (SPAC) initial public offering (IPO) that they won’t tolerate any potential dilution. In fact, the offering was so disastrous that it was pared down from 13 million to 10.4 million shares.
The Question of Liquidity
It isn’t hard to understand why investors might be frustrated with QS and its shares. QS stock carried a market capitalization that neared $50 billion in late December. It currently sits at just over $18 billion. Naturally, shareholders are going to keep pressing the company to show them tangible evidence of progress.
Further, the company had already announced that it would spend between $230 and $290 million to build out its production. At that time, it gave guidance that it would enter 2022 with $900 million in liquidity (Page 8). It already had a surplus of cash on hand.
So, why did QS need to boost that in order to expand the production line? The company could have simply revised that guidance downward, using that liquidity to cover its equity contribution.
Because of all these factors, I believe investors are going to survey the battery landscape with more scrutiny moving forward.
Competition in Other Places
Lastly though, when Quantumscape came out, it was heralded as the company leading the charge in the solid-state lithium battery field. However, the truth is there are many startups bristling to bring their technology to market in this niche. Interested readers can find some of their names here.
Those companies represent the smaller-name competition coming Quantumscape’s way. But there’s also bigger players, too. Many of these are big Asian conglomerates with a lot of resources and sway. Toyota (NYSE:TM), Hyundai (OTCMKTS:HYMTF), LG and Samsung are just some of those names.
So, with plenty of worrying factors and competition on the horizon, now is not the time to buy into QS stock. My guess is that it has more room to run downward in the near term.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.