Quantumscape (NYSE:QS) stock is slowly deteriorating, down over 18% in the past month. Back in June, I wrote that QS stock was likely to continue falling, given its poor business model. In effect, the electric vehicle (EV) battery maker is just a research organization with an unproven product that won’t be made for at least three years.
Despite having Volkwagen (OTCMKTS:VWAGY) as its main corporate sponsor (and likely client), there’s no guarantee that Quantumscape can develop a solid-state electric battery for mass production. However, recently with its second-quarter earnings release and shareholder letter, the company claims to have gotten closer to its goal.
On Jul. 27, QS announced it had advanced to the 10-layer battery cell level and is now testing these cells. The company had originally aimed to do this by the end of 2021. So, they are ahead of schedule. This is also an improvement over its previous four-layer cell batteries. Additionally, the company has made progress with its anode-free lithium-metal cells, as well as started setting up a “pre-pilot manufacturing line in San Jose, California.”
However, Quantumscape is still very far off from getting its batteries into production on a mass scale. So, despite this good news, investors can expect to see the company continue to burn through cash.
Where QS Stock Is Now
During Q2, Quantumscape lost $49.6 million on an operating basis and burnt through $63.5 million on a free cash flow (FCF) basis. However, it was also able to raise $110.8 million from equity and preferred stock sales, partly from the exercise of warrants.
As a result, Quantumscape’s cash balance did not take a hit, despite the cash burn. The company still has over $1.56 billion in cash and securities on its balance sheet. That is up from $997 million at the end of 2020.
In other words, the company can last a long time burning through cash even without having any revenue. In fact, QS won’t even start to generate revenue until 2024. That is over two years from now — and then it will still only make $14 million. Revenue will actually not even begin to accelerate significantly until 2026, when it’s forecast to reach $275 million. Plus, the cash flow burn rate will be significant. This can be seen on its original slide deck (Page 28).
So, for all intents and purposes, Quantumscape is more of a research organization than it is revenue-producing company. It is also probably public way too early. How long will the market put up with this? Personally, I don’t think the market is prepared to wait as long as it will take QS to start showing sales and cash flow. As I wrote last time, something has to change if QS stock is going to do anything but drop.
What to Do with QS Stock
For some reason, analysts still seem enamored with this money-losing company. According to Yahoo! Finance, five analysts have an average target price of $44.20 for QS stock. However, Tipranks indicates that five analysts give it an average price target of $32. This is still about 35% over the Aug. 2 price of around $23.
The one thing that this stock has going for itself is Volkswagen’s interest in the company. For example, if Quantumscape ever needed more cash, they could likely turn to the German carmaker for a loan or something of that natrue. In fact, Volkswagen could potentially make a takeover offer if QS stock gets too cheap.
Since the company has no revenue and profits, it’s very hard to put a value on it. You have to believe that its projections will come to pass. But right now, that’s still a long way off. As such, this is a wait-and-see stock — at least until the company can show the money, so to speak.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.