This month, QuantumScape (NYSE:QS) shares have modestly climbed in price. Is this due to any news directly related to QS stock? No.
The electric vehicle battery startup has not made any big announcements in well over a month. As you may recall, QS last reported earnings on April 26, and released an up-to-date investor presentation on May 3.
That said, it’s not as if this stock is mysteriously moving higher. There appears to be a reason this stock, much like other speculative growth plays, are performing well right now.
However, what is currently giving QS a boost may prove fleeting. If that’s not bad enough, if company specifics become top of mind again with this stock, it’s more likely to be a negative than a positive for share price performance.
With this, you should view the stock’s recent performance as anything but an invitation to buy.
Why QS Stock is Inching Higher
If not because of company-related news, what is helping QuantumScape to gain this month? Perhaps it has to do with improving market sentiment, and how the rising tide of bullishness is lifting all boats.
Over the past few months, investors have become more bullish about growth stocks. This is because of the emergence of the artificial intelligence (or AI) secular growth trend, plus rising hopes that the Federal Reserve will first pause, then reverse course, on interest rate hikes.
Although these factors have had a greater impact on shares in larger, more established names, this improvement in market sentiment seems to be providing support to smaller, less-strong names like QS stock. So, with this factor in play, why is it still wise to be cautious?
Mr. Market may have become less fearful, but it may be way too early to state that a “new bull market” has taken shape, as Business Insider recently argued.
The economy and the stock market aren’t necessarily out of the woods when it comes to macro issues. Sentiment may again turn on a dime. This could take the situation with QuantumScape from okay to bad, and then on to worse.
This Stock Could Experience a Two-Step Plunge
QS stock may not necessarily be setting the world on fire, as it trends slightly higher while other growth stocks are truly knocking it out of the park. Yet while shares may only receive a small benefit from current trends, the reversal of this trend could kick off an outsized decline in price.
First, a market reversal, if the Fed fails to change course on its current interest rate policy, and the chances of a “hard landing” spike again.
Such events could throw the market back into a “risk-off” mindset, which may modestly curb “AI mania,” but make investors even more cautious about growth stories with far greater uncertainty, such as QuantumScape.
Second, after retreating towards its 52-week low ($5.11 per share), news more relevant to the company itself may knock QS to lower prices. For instance, like I have argued previously, there’s a strong chance that the company will need to raise additional capital.
This could place pressure on shares because of the dilutive impact of further secondary offerings. Although there may be an event later this year that briefly gives QS another spike, it may not save the day.
Continue Taking a Cautious Approach
Recently, InvestorPlace’s Dana Blankenhorn pointed out that QuantumScape’s “moment of truth” is just around the corner. How so? Later this year, the company will deliver its first marketable product. This product release could make or break it.
However, even if it “makes it,” that may not necessarily mean big gains ahead for the stock. Again, shares could likely rally on the onset of this news, especially if QS remains heavily-shorted (around 21% of outstanding float is currently sold short).
Still, given how investors have become skeptical about early-stage EV manufacturers, due to their struggles in scaling up production/reaching profitability, it’s possible the market “waits and sees” with QS rather than rushes back into it with full force.
Coupling uncertain recovery prospects with the strong possibility of a two-step plunge in the coming months, continue taking a cautious approach with QS stock.
On the date of publication, Thomas Niel 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.