Hit hard by last month’s volatility, electric vehicle (EV) battery maker QuantumScape (NYSE:QS) has seemingly bottomed out at between $15 and $20 per share. It remains to be seen whether QS stock has found a floor at this price range. Namely, because future moves lower may hinge mostly on a further negative reaction to interest rate hikes.
That is, if the Federal Reserve winds up raising rates to a greater extent than anticipated? Higher-than-expected rates will result in even lower valuations for growth stocks such as this one. If rate hikes come in as expected? As the narrative around this stock is largely still in place, it may be able to sustain its current valuation.
But even if the upcoming increase to interest rates is “priced in,” that may not mean now’s the time to dive into early stage electric vehicle plays. Especially one that will not enter the commercial stage until the mid-2020s, at the earliest.
Add in the fact that the company looks less like a sure thing when you delve into the details? As it’s been in the case for quite some time, there’s still no reason to dive into it.
QS Stock and Downside Risk
Before exploring its near-term upside, or lack thereof, let’s take a look at the possibility of further declines for QuantumScape shares. Again, uncertainty over rising interest rates drove its big drop last month.
This will likely remain the main factor behind any more pullbacks in QS stock. Outside of higher rates compressing its valuation, in the short-term other factors may play a more minimal role. Mainly, because the “story” behind this stock remains largely intact.
In a nutshell, the bull case for QuantumsScape all comes down to its solid-state battery (SSB) technology. The auto industry is betting big that SSBs supplant lithium ion batteries as the dominant battery type used in EVs. Once it’s ready to bring EV SSBs to market, this company is in a strong position to dominate the space.
The bull case is further bolstered by the fact that it already has Volkswagen (OTCMKTS:VWAGY) and China-based SAIC Motors, both large automakers, as partners. With this, once ready for prime time, the company could generate billions per year in sales, more than justifying its current valuation.
Although the market has become more doubtful about the company, as it’s still possible that this “best case scenario” plays out, there will be enough investors willing to buy at its current valuation (market capitalization of around $7.2 billion). That said, whether they’ll be willing to pay much more than that right now is up for debate.
The Longer-Term is Still Murky
QS stock could hold steady at between $15 to $20 per share. But don’t hold your breath when making a rapid run back to $25 or $30 per share anytime soon. Why? Mostly, because the “EV bubble” is in the rearview mirror.
Much like how internet stocks performed after the dotcom bubble burst, EV plays going forward could produce middling returns. Even as the industry keeps experiencing above-average levels of growth. Without the type of speculative frenzy seen in 2020 and 2021, it may be doubtful that QuantumScape can add more to its valuation over the next twelve months.
Worse yet, not only could it take lots of time for the stock to take off again. It’s questionable whether this happens at all. As my InvestorPlace colleague Josh Enomoto recently argued, it’s not for certain that the company will be ready to sell its SSBs by 2024. It may take a few more years before it’s ready to exit the pre-revenue stage.
Furthermore, this is assuming that the company continues to make progress, with few hiccups. There’s still the chance that its technology winds up being a literal dud. Between issues with mass production, and/or competition from other companies throwing their hat in the SSB battery ring, the ultimate level of annual sales it eventually achieves could wind up being far less than past projections.
The Bottom Line
Investors have many options when it comes to opportunities with a worthwhile risk/return proposition. For instance, you can buy shares in underappreciated EV maker Fisker (NYSE:FSR). EVgo (NASDAQ:EVGO), a provider of charging services, is another name where upside potential may vastly exceed downside risk.
In the case of QuantumScape, downside risk in the short-term may be low. But so is upside potential. Over a longer timeframe, its prospects are uncertain. Commercialization delays, and/or production hiccups could result in those still bullish on it now finally giving up on it.
Put simply, QS stock is a moonshot, priced as if it has the bird in hand. There’s no need to buy it at today’s prices.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
