Among the high-potential, narrative-driven investments, few can touch the blistering highs and devasting lows of QuantumScape (NYSE:QS) stock.
Entering the public arena via a reverse merger with a special purpose acquisition company (SPAC) last year, QuantumScape also demonstrated the allures and pitfalls of business combinations. All this has combined to make QS stock an intriguing play – and not necessarily in a good way.
Following intense interest in the company for proposing a game-changing solid-state battery (SSB) solution for electric vehicles, many people jumped on the bandwagon. To be fair, I can appreciate why they did that. Although EVs represent the future of mobility, they currently run into several challenges, chief among them (in my opinion) is cost.
According to InsideEVs.com, the cheapest electric-powered car you can buy today is the Mini Cooper SE, which starts at just under $30,000. Of course, that’s just the “paper” price. Factor in the supply chain disruption of semiconductors along with other pandemic-related headwinds and you’re likely talking about the Mini commanding a not-so-diminutive premium.
But even ignoring the impact of the pandemic, a $30,000 car is not cheap. Let’s be generous and take out taxes, licensing and registration and you’re still talking a $500 payment over 60 months. When the median household income is $62,843 (which translates to $5,404 monthly), you can see that the numbers just don’t work well when you factor in reality (i.e., taxes and fees).
But that’s the promise undergirding QS stock. With SSBs, QuantumScape can pack more energy density across a smaller physical footprint. Translation? More capacity, greater range, lower cost. Basically, QuantumScape would address virtually every concern about EVs in one fell swoop.
But this one-fell-swoop argument also brings up a worrying point about QS stock: companies that promise the world don’t always deliver.
QS Stock and the Resilient Technology Conundrum
As sports fans know, baseball is a game of averages. Given the difficulties in hitting a small projectile with a cylindrical object, you can’t always depend on even your star players to deliver every single day. In fact, looking at batting averages over a season, baseball is really a game of controlled failure.
And because it’s a game of controlled failure, baseball incorporates myriad strategies – perhaps more strategic options than any other game (don’t quote me on that). At a basic level, batters must decide based on the situation whether they should hit for solid contact or swing for the fences.
In this analogy, of course, QS stock is akin to the speculative call for going after a grand slam. It could happen but it’s also unlikely to materialize. Home runs are rare and grand slams rarer still.
Invariably, this raises a conundrum for QS stock. The longer it takes the underlying company to deliver a product to market, the likelier it is that QuantumScape’s small-ball competitors will outshine the SSB specialist.
Here’s the thing. By small-ball competitors, I’m not talking about other SSB rivals. Rather, I’m pointing to the good old combustion engine.
That’s right, what people may not appreciate is that while companies like QuantumScape keep flailing at pitches, the combustion engine focuses on good contact. Sometimes, it will bunt and other times, it will get a hit – maybe even extra bases. But more often than not, dirty, anachronistic combustion engines are doing productive things (no matter how small) at the plate.
In fact, if you look at long-term fuel economy trends for cars on U.S. roads, improvements generally trend positively. As it continues to do so, it raises the stakes for QS stock. Basically, the underlying company has to deliver something big or else it’s a lost cause.
A Better Risk Proposition, But Still Risky
In recent articles about QS stock, I mentioned that shares – after having lost so much value over the past several months – represent a far greater risk-reward proposition today. I stand by that thought process since QuantumScape certainly has upside potential.
Let me be blunt: if the company succeeds in its goals, QS stock could offer cryptocurrency-like gains from current levels.
But no one should buy shares under a false impression. The probability of utter failure is likely much higher than the probability of success. And as the anachronistic combustion engine continues to make solid gains in efficiency, it begs the question: for how long and how much will investors grant a premium to QS stock?
On the date of publication, Josh Enomoto 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.
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.