QS Stock Reality Check: Why I Would Avoid QuantumScape at All Costs

Stocks to sell

QuantumScape (NYSE:QS) stock has bounced back after sliding post-earnings late last month, but it probably won’t last. Changing hands at just under $6 per share, QS will stay stuck until it provides an update. Given that this stock was trading at triple-digit prices a little less than three years ago, you may think it’s a bargain right now. However, a closer look suggests that this is not the case.

Worse yet, it’s not as if all you need to do is keep shares on your watchlist, and pounce if/when shares hit the “right price” (more below). The stock may only hit such levels, if this early-stage firm’s prospects significantly worsen.

QS Stock: A Counter to My Take on Shares Post-Earnings

In my last QuantumScape (NYSE:QS) article, I mainly discussed the company’s latest quarterly earnings release and investor update, but I also touched on what I believe is the “right price” shares must trade at before considering it a buy: $3 per share, where the book value of QS stock currently stands.

Although publicly-traded QuantumScape peers like Solid Power (NASDAQ:SLDP) trade at discounts to book value, I argued that, given the market greater awareness compared to SLDP, while QS may fall to book value, it may find support before dropping to levels well below book.

But taking a second look, I’ve come up with a counter to my “right price” thesis. Over the past two years, the stock has been affected by the end of the “EV bubble,” the impact of high interest rates on speculative growth stocks, along with disappointing commercialization progress and high shareholder dilution.

Nevertheless, while trading materially below past highs, future potential rather than current performance/assets still make up a large portion of its valuation. If such dramatic shifts in circumstances haven’t been enough to make shares a bargain, what will?

Hitting the ‘Right Price’ for the Wrong Reason

Longtime QS stock investors sitting on big losses may beg to differ, but perhaps this company, and by extension, its shares, still have the benefit of the doubt on their side. While QuantumScape has yet to make a major breakthrough in solid state EV batteries, it hasn’t exactly failed, either.

Based on the company’s latest shareholder letter, QS continues in its efforts to develop SSBs for electric vehicles. This status may be enough to keep the stock at or near present levels. Shares may ultimately only hit what I consider the “right price,” but for the wrong reason.

For example, larger battery makers like Samsung SDI bring SSBs to market well before QuantumScape. This would most likely limit QS’s potential to expand its customer base beyond strategic partner Volkswagen (OTCMKTS:VWAGY).

Alternatively, over the next three years, QuantumScape may consume its cash position, yielding limited outcomes. Investment capital for EV upstarts keeps drying up, creating a situation where QuantumScape can’t even conduct more dilutive capital raises, even if it needs to in order to survive.

The Verdict

So, if QS is too pricey today, but will only become cheap if its already uncertain success changes worsen, what is the best course of action.

Diving in at current levels is not worthwhile, not even as a trade. QuantumScape may have at one point been popular with the “meme stock” crowd as a short squeeze play, but retail chatter about QS keeps waning.

According to Fintel, short interest continues to drop as well. Short interest was at 15.2% of outstanding float ahead of earnings, and now stands at around 14.8% of outstanding float. The once-crowded short-side keeps unwinding past bearish positions, reducing QS’s “squeeze appeal.”

Unless a situation merges where this stock plunges on no news, it may then be a buy. However, if QS stock languishes from here, or drops following negative news, make sure to stay away at all costs.

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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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