QuantumScape (NYSE:QS) has been one of the most successful special purpose acquisition companies (SPACs) ever. QS stock rocketed from the initial $10 offering price to as high as $130 at one point. That’s simply incredible. Even in a year where a lot of SPACs had unprecedented success, QuantumScape stood out from the pack.
However, QuantumScape’s outlook is now rapidly dimming. Shares have lost three-quarters of their value from the recent peak. The selling hasn’t stopped either. QS stock recently hit just $30 a share before rallying over the past few days.
In isolation, QuantumScape’s stock performance might not be terrible. After all, the rally last year was clearly a little overdone and SPAC stocks in general are getting hammered. What’s wrong with QuantumSpace pulling back to a less ambitious valuation?
However, the big issue isn’t just profit-taking, it’s that investors are now questioning whether QuantumScape’s business will ever work at all.
QuantumScape: The Scorpion Stings
Earlier in April, Scorpion Capital put out an exhaustive 188-page report calling all parts of QuantumScape’s business into question. I know people like to dismiss short reports, and often with good reason. There’s plenty of shoddy work in the space, to be sure.
However, sometimes a short seller report is right on the money, and investors should proceed with great caution. It’s still early and QuantumScape could prove Scorpion wrong, but it looks like the firm may have nailed it on this one.
Notably, Scorpion interviewed 15 people, including various ex-QuantumScape research & development employees and Volkswagen (OTCMKTS:VWAGY) officials, along with industry experts. You really need to read the report to get the full gravity of the quotations Scorpion highlighted. That said, it’s notable how the QuantumScape employees in particular hammer the CEO, Jagdeep Singh, for being highly promotional and jumping to claims that aren’t necessarily backed by the data.
The Next Theranos?
A blood testing firm called Theranos rose to prominence a few years ago. It appeared to have revolutionary testing equipment that would make it much easier to identify blood issues. Theranos raised $700 million and was valued at almost $10 billion at one point. It signed deals with major pharmacy chains, among other credible backers. Yet, it was all a sham. The testing equipment didn’t actually work as promised. Theranos collapsed.
Scorpion alleges that QuantumScape could be the next Theranos. That’s not just empty talk, either. The Scorpion report spends more than 60 pages going through six key technical concerns about QuantumScape’s battery technology.
There’s detailed discussion of battery life, function in cold weather, recharging time, and more. If you have any financial interest in QS stock, you owe it to yourself to read through these arguments and come to your own conclusions on their validity.
Questions About Volkswagen Backing
One particularly worrisome quote came from a senior Volkswagen employee. They said that Volkwagen’s engineers have concerns about QuantumScape’s data and that management had pressed ahead with the investment despite that. Furthermore, Volkswagen reportedly hasn’t given QuantumScape firm purchase orders yet, nor does it have access to QuantumScape’s precise chemistry details to validate the battery model.
This should be a point of particular concern for QS stock bulls. It’s been easy to say that QuantumScape’s science must work because Volkswagen is a key supporter. However, if Scorpion’s work is correct, perhaps Volkswagen’s senior management invested in hopes of getting great press coverage for forward-thinking investment in green energy even over concerns from the actual engineers and scientists at the company.
QS Stock Verdict
It’s good to be open-minded about short seller reports. Sure, some of them are issued with dubious intentions. And sometimes the bears get facts wrong. Frequently, such reports end up creating buying opportunities for the stock in question. Like any piece of due diligence, read a short seller report with a grain of salt.
That said, sometimes you see one and it’s a complete game-changer. Such is the case with the Scorpion report on QS stock. If even half the quotes and documentation in this report are correct, QuantumScape stock would be a colossal disaster going forward.
It’s hard to overstate just how thorough and crushing this report is for QuantumScape’s credibility. Expect QS stock to continue trading lower in coming weeks as people realize that the company’s reputation may be permanently damaged.
From all accounts, QuantumScape’s CEO is a charismatic fellow. Perhaps he can win back some institutional support. However, until QuantumScape actually turns out successful batteries and starts generating revenues, it’s going to be hard to trust the company. As it stands, the Scorpion report has been out for more than a week now, and yet QS stock remains under pressure.
If Scorpion had gotten major parts of its research wrong, we’d probably have heard a solid refutation by now. For now, investors should operate under the assumption that there are major doubts about QuantumScape’s battery technology and commercial prospects.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.