Short-selling attacks on speculative but promising nascent companies are nothing new. The formula for profiting is simple. Buy puts and start a short-position against QuantumScape (NYSE:QS) stock. Release a short report and then cover the short.
A few weeks ago, Scorpion Capital posted a 188-page research report titled, “A Pump and Dump SPAC Scam By Silicon Valley Celebrities, That Makes Theranos Look Like Amateurs.”
The report reads like a tabloid, with the usual overuse of bold font, underlined text, and screen captures of Chief Executive Officer Jagdeep Singha.
In the short report, Scorpion interviewed five former employees to undermine QuantumScape’s scientific assertions. QS is valued so highly because investors believe the company has solid-state material that resists dendrites. It also has battery performance in low temperatures and fast-charging to 80% in under 15 minutes.
Once proven, these enhancements could advance electric vehicle adoption, lower operating costs for EVs and narrow the gap with gas-powered automobiles.
QS is an easy target, too. Formed through a Special Purpose Acquisition Company, the company closely guards its technology. It made no claims that it will have any revenue soon.
Short-Selling and QS Stock
Short float is on the rise. According to finviz, bears now have a 16.2% short float against the company. QuantumScape is still at least three years away before it has a product on the market. Uncertainties are at the highest now, giving bears a chance to profit from the stock’s decline.
When the Securities and Exchange Commission updated its guidance on special purpose acquisition companies (SPACs), Social Capital Hedosophia Holdings Corp. IV (NYSE:IPOE) needed to restate figures to comply.
In the 8-K filing, IPOE wrote, “it is appropriate to restate (i) certain items on the Company’s previously issued audited balance sheet dated as of October 14, 2020, which was related to its IPO.”
IPOE will also issue a restatement for its audited financial statement as of Dec. 31, 2020, and for the July 10, 2020 – Dec. 31 2020 period. The new rules against the SPACs will harm QS valuations. SPACs will need to account for warrants, which will remove the speculative froth that lifted QS stock and the others a few months ago.
The SPAC structure enabled QS to raise billions from the stock exchange. Fundamentals strengthened when Volkswagon (OTCMKTS:VLKAF) invested another $100 million in the firm. On March 31, QS said it met the technical milestone, unlocking the VW investment.
The milestone paves the way for the two firms to continue working jointly. QS is on the path to bringing solid-state lithium-metal battery technology for mass production.
Scorpion’s bearish research effectively questions VW’s investment and deep conviction on QuantumScape technology.
Wildly shifting sentiment for clean energy and the EV sector also plays a role in the volatility in QS shares.
For example, Nikola (NASDAQ:NKLA) and Workhorse Group (NASDAQ:WKHS) fell alongside QuantumScape shares on April 15, the day Scorpion Capital posted the report. Renewed optimism for the sector will revive the performance of QS shares on the markets.
Investors have no model to rely on to calculate a fair value on QuantumScape. This comparable model gives a sense of where the stock is worth relative to the benchmark.
QuantumScape may potentially revolutionize the battery electric market with its inventions. The EV market needs fast-charging batteries. QS has the capital and the talented staff to see that through.
Shareholders need to brace for the volatile ride ahead before the company gets there in a few years.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.