While expecting the latest QuantumScape (NYSE:QS) rally to prove fleeting, I didn’t think it would reverse course so far, so fast. That is, within days of publication of my latest bearish take on QS stock, it has given back the gains from its post-earnings surge, and then some.
Between July 31 and today, shares in this electric vehicle battery technology company have fallen from a 52-week high of $13.86 per share, back on down to just above $8 per share.
If you haven’t read the latest headlines about this publicly traded startup, you may think this sharp sell-off has something to do with meme traders (who perhaps bought in on short squeeze speculation) trying to cash out all at once.
However, what drove the meme crowd to decide to jump ship en masse? A new development from the company, one that bodes badly for future prices.
The News Behind the QS Stock Plunge
Admittedly, for investors who bought this stock as recently as July 26 (just before earnings), losses from QS’s latest whipsaw move have been moderately high, but not severe.
Yet if you bought in during the post-earnings wave of “short squeeze mania,” you could be down more than 40% on your position.
After hinting at it above, you may be wondering what the “big news” is driving this severe reversal for QS stock. The “big news” in question is the company’s announced plans to raise additional capital, through a $300 million stock offering.
Although QuantumScape has massive potential, with its plans to scale and commercialize solid state batteries for EVs, this potential is going to take substantial capital to be realized.
The company needs to continue burning through hundreds of millions of dollars each year to bring its SSBs (which stand to be in high demand, given their advantages over lithium ion batteries) to market.
Still, while it’s not surprising QuantumScape wants to bolster its war chest, what’s surprising is why they have decided to do so now, just days after reiterating it has enough cash on hand to sustain operations until mid-2025.
Underscoring a Key Risk
The capital raise news has thrown QS stock investors for a loop. The above statement about cash runway, when announced, helped to ease concerns about a key risk with shares.
That would be how much future dilution could water down returns. Yet with this news, the company has gone from easing dilution concerns, to underscoring that dilution remains a major risk.
Down the road, QuantumScape could reach the commercialization stage. After that, scale up to the point of profitability. If this happens, the company will undoubtedly be worth more than its current market cap ($3.87 billion).
However, if the share count keeps climbing, the resultant upside for investors buying today could be far lower than expected.
Yes, the upcoming $300 million share offering only increases QS’s share count by 37.5 million (or by 7.73%). It’s not as if QS needs a few hundred million more to finance its (possible) transformation into a leading EV battery maker.
Chances are, it will require billions more in additional cash to reach this stage. In the end, future dilution could be in the high double-digit range, if not in the triple-digits.
Bottom Line
Sure, even if QuantumScape doubles its share count (or more) between now and the late-2020s (when QS’s SSB production could be in full swing), you may still think shares are worthy of a buy.
After all, isn’t this company primed to be a major EV battery supplier? Not necessarily. While potential demand for SSBs could be high, it’s not as if QuantumScape is the only company out there working on this technology.
Many other automotive and battery makers are betting big on SSBs as well. In fact, some battery rivals could beat QS to the chase, rendering it an “also ran,” before it gets a chance to become a major player.
If this happens, future growth for QuantumScape will fail to make up for the likely additional dilution. With the latest news bringing more attention to this key QS stock risk, sell now, to lock in profits/cut losses.
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.
