The last time I wrote about Quantum Scape (NYSE:QS) stock was in early May.
The reality is that QS stock hasn’t traded below $20 consistently since November 2020. If it falls below $20, who knows where it will end up.
If you’re a believer in QuantumScape’s technology, this is where the rubber meets the road.
While you hardly could describe QS stock as a falling knife — it has taken three months to lose 50% of its value — nonetheless, that’s a big paper loss for anyone to stomach.
While I was very enthusiastic about its efforts to deliver a solid-state lithium-metal electric battery that goes farther and charges faster, QS stock had been pummeled into submission.
Back then, I was having second thoughts about sending readers down a possible rabbit hole. As a result, I recommended three alternatives to give you exposure to QS while reducing your downside risk.
| Investment |
May 7, 2021 Closing Price |
July 27, 2021 Closing Price |
% Return |
| Volkswagen (OTCMKTS:VWAGY) | $31.57 | $33.05 | 4.7% |
| First Trust NASDAQ Global Auto Index Fund (NASDAQ:CARZ) | $56.14 | $58.17 | 3.6% |
| Global X CleanTech ETF (NASDAQ:CTEC) | $18.47 | $18.66 | 1.0% |
| QuantumScape | $31.02 | $21.41 | -31.0% |
I’m happy to report that all three significantly outperformed QuantumScape on a relative basis. Of course, you wouldn’t have gotten rich opting for one of my alternatives, but you would have saved yourself a lot of grief.
At this point, QS still is in serious trouble. I wouldn’t blame you if you took your ball and went home.
However, if you’re a super-aggressive, speculative investor, it’s definitely getting into the buy zone.
Here’s why.
Q2 2021 Earnings and QS Stock
The company reported its Q2 2021 results on July 27 after the markets closed. It finished Q2 with a $49.6 million operating loss, up 249% higher than a year ago.
Thanks to a $130.6 million change in the fair value of assumed common stock warrant liabilities, it had a net income of $80.2 million for the quarter.
However, as Warren Buffett has said, don’t pay much attention to the accounting profit. It’s fleeting.
“The change in fair value of Assumed Common Stock Warrant liabilities consists of the change in fair value of the Public Warrants and Private Placement Warrants assumed in connection with the Business Combination,” Page 25 of the company’s Q1 2021 10-Q stated.
It went on to say that the company expected to “incur an incremental income (expense) for the fair value adjustments for the outstanding Assumed Common Stock Warrant liabilities at the end of each reporting period or through the exercise of the warrants.”
Given the company has no revenue, the first six pages of its 2021 fiscal letter were reserved for technical discussions about the development of its batteries. I’m no technical genius, but I took a several points from CEO Jagdeep Singh and CFO Kevin Hettrich’s letter.
First, commercial production of its battery is still 3-4 years away. So, it’s going to continue to deliver quarterly losses whether shareholders like it or not.
Second, the $145 million — midpoint between $130 million and $160 million — it intended to spend on operations in 2021 is likely going to be higher.
Finally, even if it spends $290 million a year until 2025, it will still have plenty of cash going into commercialization. That’s because it used $98.1 million in free cash flow (FCF) in the first six months of 2021.
That’s up from $31.9 million in the first six months of 2020, but still easily manageable despite having no revenue.
Double the FCF used, and it’s still only $196.2 million in 2021. QuantumScape expects to have more than $1.3 billion in liquidity heading into 2022.
I’m assuming the cash projections include the cash generated from the exercise of 1.54 million warrants to buy the equivalent amount of QS stock at $11.50 per share.
In the first two quarters, the company has raised $575 million from the exercise of warrants and issuance of stock.
As I said, barring an incredible surge in expenses, it’s got the cash, and even if it didn’t, it could probably find people to lend it what it needs.
The quarterly report was steady as she goes.
Buy on the Dip
InvestorPlace’s Chris MacDonald recently discussed the initiation of QuantumScape coverage by JPMorgan analysts.
JPM started QS at neutral with a $35 target price. My colleague suggested that owners of QS stock should hold its stock through Q2 2021 earnings, which I discussed above.
He feels the bar is set so low. Two analysts rate QS “buy” and four rate it “hold,” but the target price is $35.50 at the median and $40 at the average. Any contrarian investors who jump on board at current prices will surely benefit from any future good news.
In this case, good news means nothing extraordinary. Well, that’s precisely what happened in the second quarter. Trading today around $23, it will have to continue to report decent-sized losses, not humongous losses.
InvestorPlace’s Luke Lango recently used Tesla (NASDAQ:TSLA) to explain why certain companies can get away with mediocre results.
“Tesla is also a great example of how groundbreaking technology supersedes given timelines. Elon Musk and Tesla consistently overpromised and underdelivered in terms of timing well throughout the 2010s. These lofty promises resulted in TSLA stock taking a beating over the years,” Lango stated on July 22.
He’s so right.
We won’t know for some time whether Bill Gates and Volkswagen were right to throw their support behind QuantumScape. But, as Luke says, if you’re patient money QS stock below $20 is a very intriguing buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
