Don’t let the title fool you, I am not a fan of QuantumScape (NYSE:QS) stock prospects. I think the company’s goals are noble, but they are not likely to succeed.
Making a solid state battery work in any condition on an electric vehicle is a tall order. It may work in a lab setting but not under the big load of an EV. That was my spoiler alert, but stay tuned because I will argue for why we need them to succeed. The long-term thesis for QS stock is valid even if it’s not mine.
The experts have opposing opinions on the fundamentals, and I don’t claim to be one. I do have a degree in electrical engineering, but certainly am not an expert in this field.
I am rooting for them to succeed for a very simple reason. The world seems to be on track to replace the internal combustion engines (ICE) with EVs. I don’t think that it will end well with our current battery technologies.
The Future of EVs Needs QS
We produce more than 80 million vehicles per year, even last year we did 78 million. Only a tiny fraction were EVs, so the changeover runway is long. But to accomplish total replacement of ICE means that we will need an enormous number of batteries. Moreover, there better be a high rate of recycling going on too. This is me saying “it ain’t gonna happen.” Therein lies the need for QS to succeed.
There is another threat and it involves safety. Current batteries are prone to spontaneous combustion. It’s a fact and completely unpredictable. It happened last month to my in-law’s neighbor. The basic reason for it is that the two terminals touch and ignite violently. Build-up material (much like a stalactite) eventually bridge the flammable electrolyte liquid that separates the anode from the cathode. A solid state core would eliminate this problem because it is more stable than the liquid.
QS Stock Price Showing Progress
You can now understand why last year QS stock spiked almost 1,000%. If they can accomplish their goals it would be the holy grail of EV opportunities. But then reality set in and it fell as much as 85%. Finally, the bulls have formed a bottom and they are on a positive trend. For the last two months, they rallied 30% off the August base.
From here is where the hard work starts because they will come into resistance levels. I expect sellers to be lurking near $27 and $29 per share. These are not insurmountable but they will present a big problem. It would be ideal if the company can muster up a headline of any kind to help burst through. Else it may take a lot of time and effort – and I worry about that.
The indices are on borrowed time if you believe the experts. They worry about the bull run being so old and tired. I disagree, but I can’t stop the prevailing meme. They can’t call for a recession and hyper inflation at the same time. I am cautiously optimistic that QS stock will have the benefit of a bullish market for a few more months. Longer term, management will need to take the reins from momentum traders to invite fundamental investors.
Complete Bet on the Outcome
This is about the point where I present the arguments for the health of the business. In this case there aren’t any financials to share because it’s a binary outcome. It’s an all-or-nothing scenario, or at least that is how they built the perception to be.
Management may do well diversifying its story away from just EVs. It’s never a great idea to put all the proverbial eggs in one basket. Then again that’s how the world changes big time, one brave company in a blue moon. Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA) are two that come to mind. They attempted to do impossible feats and they succeeded. Along the way, they had skeptics and hoards who tried to short stock.
Yes, I am a skeptic for QuantumScape’s outlook. But I most certainly am not shorting the QS stock. It is bad juju to bet against the success of a company that is trying to better humanity. I will stand by the sidelines and clap for its successes.
Meanwhile, those who believe in it can hold shares until they announce the score. The options markets could offer a cheaper alternative for those who prefer buying in the money leap calls instead.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.