Electric vehicles are the future. At this point, to suggest otherwise will likely lead at minimum to harshly worded counterarguments on social media forums. At worst, you could end up missing a few teeth. But one thing EV advocates won’t deny is that battery technology has more room for improvement. That’s why QuantumScape (NYSE:QS) is so exciting. With QS stock, you bet on the industry, not the brand.
While a select few companies dominate the global EV market, it’s important to realize that no individual competitor is completely insulated from disruption. For instance, I never thought I’d live to see the day that American automotive icon General Motors (NYSE:GM) would beg for a government bailout. Even now, debate still rages about whether that was the right move.
Thus, you don’t want to make too many assumptions about which EV brands will dominate in the future based on immediacy bias. Anything can happen. Plus, with the arrival of Chinese competitors, this will be a crowded space. What likely won’t see disruption is a game-changing innovator in the EV battery market. Should QuantumScape succeed in forwarding a solid-state battery, QS stock will soar to the moon — and possibly stay there.
After all, solid-state batteries represent the holy grail of EV battery technology. Many are trying to figure out the specifics, including Toyota (NYSE:TM). But the problem that manufacturers are running into is the compromise of innovation. SSBs are available, that’s not the issue. Rather, it’s whether this alternative is superior to the current lithium-ion technology.
For instance, it does no good if SSBs deliver on the performance and range front, only to be exorbitantly expensive. With Toyota’s case, its SSB project is encouraging but suffers from a lifespan issue. Again, that’s a no-no if your EV cuts out after only a few charging cycles.
Can QS stock deliver where others have fallen short? It’s possible but you want to be extremely careful.
Lack of Standardization Hurts QS Stock
A few weeks ago, QuantumScape got a taste of life in the public market. Yes, a potentially groundbreaking firm typically attracts positive attention. But short sellers are never too far behind and QS stock came into their crosshairs.
Specifically, activist firm Scorpion Capital minced no words, calling QuantumScape a “scam.” You got to give credit for the company’s directness, I suppose. But the heart of Scorpion’s accusations, while pertinent, didn’t provide any fresh insights.
For instance, the short seller raised issues “such as the difficulty of finding new industry-grade materials, showing test results from small batteries, or not subjecting the battery to independent evaluation.” Of course, QuantumScape nor its competitors are eager to reveal their secret sauce given how competitive this industry is and how much they’ve all vested in their research.
Nevertheless, it’s fair to point out that investors have every reason to be skeptical. This isn’t meant to impugn QS stock in any way. Many other companies have attempted to crack the SSB code, only to fail miserably. So just based on pure statistics, neither QuantumScape nor its rivals are exactly confidence inspiring.
But moving forward in the near to intermediate term, one of the biggest challenges to QS stock from an investment perspective is standardization, or the lack of it. Because SSBs represent a novel technology, we don’t have a frame of reference. A consequence of this is the measurement of success. What exactly does QuantumScape’s (or anyone else’s) laboratory success really mean?
Therefore, you can’t quite blame Scorpion for labeling QS stock a scam. Again, without that frame of reference, it’s hard to know whether I’m looking at a genuine game-changer or a glorified science project: great for optics and ego boosts but irrelevant if it isn’t commercially viable.
QuantumScape Faces a Multifront Battle
If you think about it, commercial viability is not just a huge problem for SSBs but any innovation that’s still stuck in the aspirational phase. Here, you can’t just prove the science of SSBs, you’ve got to make it accessible. That means reasonable cost and all the performance characteristics the platform promises.
Otherwise, lithium-ion batteries currently get the job done just fine. I believe this is the main reason why QS stock has been so weak since peaking in late December. Even if the underlying company cracks the code before anyone else, the chances of it being a Pyrrhic victory is alarmingly high.
Ultimately, QuantumScape has a surprisingly uncomfortable risk-reward profile. Invest in it if you want to speculate. But be aware that this is no easy gamble.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
