QuantumScape (NYSE:QS) stock has defied expectations by rallying to impressive levels in recent days. However, I’m not so sure that these higher stock prices mean that this is a battery stock that’s free and clear just yet.
There’s certainly reason to have a bearish outlook on the company. In that regard, my view on QuantumScape is unchanged.
Indeed, the recent rally in QS stock is not based on fundamental factors and is driven by news unrelated to QuantumScape’s future prospects. Once the impact of this news fades, the bearish thesis may come into play.
In this article, I’ll discuss why you should avoid QuantumScape’s stock like the plague, and what factors may dampen its future prospects.
Behind the QS Stock Rally
QuantumScape’s stock often reacts to news indirectly related to the company. For example, when Toyota (NYSE:TM) announced its plans to use solid-state batteries in electric vehicles, QuantumScape’s shares initially rallied.
However, the market later interpreted this news as potentially negative for QuantumScape, as it increased competition in the SSB space.
The recent rally in QuantumScape’s stock can be attributed to the release of Tesla’s (NASDAQ:TSLA) quarterly vehicle delivery numbers. Now, broader interest around electric vehicles should boost most battery stocks. That’s logical.
But the existence of solid-state batteries isn’t upon us, and may take a decade or longer. Thus, this news does not significantly impact QuantumScape’s overall narrative.
The Bear Case
Although QuantumScape is in the early stages of developing its solid-state battery technology and currently lacks revenue, its potential market cap of $3 billion appears unjustified.
However, if the company successfully brings its batteries to market in the future, it might justify and even exceed this valuation. Several factors suggest a stronger bearish case than a bullish one.
QuantumScape has offered limited details regarding its timeline for commercializing its technology, raising uncertainty about its progress. There is no guarantee that its efforts will lead to a marketable product.
The company will probably require significant additional funding, which could dilute shareholder value and diminish the risk-to-reward ratio.
Avoid the Stock Right Away
Although investors may be tempted to engage in short-term trading to try to ride the momentum behind QS stock, it is important to consider that broader market trends influenced the recent rally and not necessarily specific company-related news.
The upward movement in EV stocks, including QuantumScape, is driven by sector-specific factors, rather than company-specific ones.
Thus, until QuantumScape comes out with some meaningful and material news on its battery development, this is a stock I think is worth steering clear from.
The macro environment could continue to provide headwinds for this company and its peers. If upcoming inflation data suggests the Federal Reserve will continue with rate hikes, speculative growth stocks may sell off again.
Given the risks at both the company and macro levels, it’s advisable to be cautious and avoid chasing the rally in QS stock.
On the date of publication, Chris MacDonald 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.
