For a hot minute, Wall Street loved electric vehicle (EV) battery technology company QuantumScape (NYSE:QS). Then, financial traders turned against the company and QS stock quickly coughed up its gains. Frankly, it’s just too risky to invest in QuantumScape now.
Don’t get the wrong idea. The investing community is fickle, and any stock is susceptible to gyrations. However, QuantumScape’s latest capital-raising effort should make anyone think twice before considering a share stake in QuantumScape.
QuantumScape’s Spending Habits and ‘Cash Runway’
Quarter after quarter, QuantumScape has released a shareholder letter indicating zero sales and no income. The company’s second-quarter 2023 shareholder letter continues this unfortunate pattern.
In order to avoid being labeled as a “zombie” company, QuantumScape has to justify its lack of income and its spending habits somehow. And, it must be said that QuantumScape knows how to spend money at a rapid pace. For full-year 2023, the company projects capital expenditures (capex) of $100 million to $150 million and cash operating expenses of $225 million to $275 million.
On the other hand, QuantumScape hinted that it might have some revenue coming in at some point. Consequently, QS stock rallied around 41.5%, from its July 26 closing price of $9.38 to its final price of $13.27 on July 28.
As far as QuantumScape’s potential sales are concerned, I’ll believe this when I see it. The company is evidently also trying to avoid the “zombie” label by forecasting a “cash runway” that extends “into the second half of 2025.”
Why QS Stock Gave Up Its Gains
Chasing a stock that just gained 41.5% can be bad for your financial health. This is a lesson that some financial traders recently had to learn the hard way, unfortunately.
Soon after rocketing higher, QS stock quickly crashed to $8, thereby giving up its prior short-term gains and then some. So, what caused the share-price pop to suddenly head south?
The culprit was QuantumScape’s announcement that it will sell 37,500,000 shares of its Class A common stock. Plus, the company “has granted the underwriters” of this public offering a “30-day option to purchase up to an additional 5,625,000 Shares.”
In other words, QuantumScape’s reassurance of a lengthy “cash runway” isn’t stopping the company from printing and selling tens of millions of shares. Thus, many QS stock traders undoubtedly objected to it diluting the value of its current pool of publicly available shares.
QS Stock: The Trust Is Gone
QuantumScape has a worrisome spending habit. But there’s another habit that’s also alarming. Once a company has diluted the value of its shares through a massive stock sale, investors might wonder whether that company will do this again in the future.
In other words, the trust is gone with QuantumScape. Printing and selling large quantities of shares to raise capital is really just a quick fix. It’s a tactic that tends to benefit the company in the short term but not the current investors.
Going forward, QS stock is likely to be volatile and, as the old saying goes, “Let the buyer beware.” The best policy, in the final analysis, is to resist the temptation to invest in QuantumScape in 2023.
On the date of publication, David Moadel 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.
