Shares of electric vehicle (EV) battery maker QuantumScape Corporation (NYSE:QS) continue to trade sideways following a disappointing earnings report. QS stock dropped 20% on the news before finding support and rallying at the $13.50 level. Stocks like QuantumScape, however, are more about the future and not about earnings. Now is the time to be a buyer of QS stock.
The future remains rosy for QuantumScape. Their solid-state lithium-metal batteries can recharge more quickly than lithium-ion batteries. They are also cheaper to produce and have a longer life than traditional batteries.
Lithium-metal batteries very well could become the new standard for EV in the new few years. This would be a major boost for QuantumScape.
Volkswagen (OTCMKTS:VWAGY) is on board and invested another $100 million in QuantumScape. The goal is to begin production in 2024. Bill Gates was an early investor, as well. It is good to have a deep-pocketed partner to ensure survival in the initial phases of development.
The analysts following QS stock remain bullish. The average 12-month price target is $26.20, which implies an 80% upside. Even the lowest forecast at $18 has a 26% upside from the current stock price of $14.28 per share.
InvestorPlace Senior Investment Analyst Luke Lango shares this bullish view. He took a deep dive on the numerous reasons to like QS stock in his recent article — especially the solid-state “forever” battery developed by QuantumScape. Mr. Lango is looking for a 10 bagger for QS stock by the end of the decade.
EV battery manufacturer stocks like QuantumScape are highly correlated to the stock price of EV makers like Tesla (NASDAQ:TSLA). So much of the recent weakness in TSLA stock has been a drag on QS stock, as well.
It is important to remember, though, that QuantumScape is not solely reliant on Tesla for their future revenue streams. Plus, EVs are definitely the future when it comes to auto manufacturing. I expect QS stock will begin to diverge in a bullish manner from TSLA stock.
QS stock is as neutral as it gets from a technical analysis perspective. The 9-day relative strength index (RSI), moving average convergence divergence (MACD), and momentum are all firmly in the midrange camp. Shares continue to hug the 20-day moving average.
QuantumScape stock continues to consolidate after holding support at the $13.50 area. The chart pattern looks very similar to the previous period of consolidation last summer that ultimately led to a sharp rally back up to the $40 area. A similar rally, maybe not of the same magnitude, may be in store. The old trading adage “never sell a dull market short” certainly applies to QS stock.
The tepid price action is being reflected in the QS options market. Current implied volatility (IV) stands at the 17th percentile. This means option prices are comparatively cheap. The prices are also at a discount to the historic volatility (HV) at the 27th percentile. IV for QS stock options is also inexpensive given that the Chicago Board Options Exchange Volatility Index — also referred to as VIX — a measure of the overall market IV, is near yearly highs.
This favors long option strategies when constructing trades. So, to position for a pop in QS stock, a bull call spread makes probabilistic sense. It is a defined risk trade which is certainly important in this market environment.
How to Trade QS Stock Now
Buy QS Aug $15 calls and sell QS Aug $17.50 calls for a $1.00 net debit.
The maximum risk on the trade is the net debit paid of $1.00, or $100 per spread. Maximum gain is $150 per spread if QS stock is above $17.50 at the August expiration. The potential return on risk is 150% if shares rise at least 15% from the Mar. 3 closing price of $15.22.
The spread is 11 deltas net long at trade inception — or the equivalent of 11 shares of QS stock. Shorter-term out-of-the-money call spreads could be sold against the August position to bring in additional premium and further reduce the overall debit paid.
On the date of publication, Tim Biggam did not hold (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.