In my last article on QuantumScape (NYSE:QS) stock, I discussed what caused it to make such a sharp whipsaw move post-earnings, and why the reason behind its latest price action was a sign to sell ASAP.
Since then, shares have continued to move lower, as investors reconsider their view on the early-stage electric vehicle battery technology company, after a post-earnings announcement that took the market by surprise (more below).
Yet despite dropping by more than 46% over the last ten trading days, don’t assume the dust has settled. Now is not the time to go contrarian. Bearishness for this stock is likely to continue in the near-term.
Any attempt to go bottom-fishing could be more like trying to catch a falling knife.
So, if not now, will a time to buy QuantumScape emerge? It’s possible, if a certain scenario ends up playing out.
Cheaper Now, but Still Not a Bargain
Investors did not arbitrarily change their minds about this stock. Although it is possible that a cycling in and out by speculators chasing a short squeeze plays a role, that was not the root cause of this massive reversal.
Rather, it was the company’s raising of $300 million in additional capital, through a secondary stock offering. Why was this bad news for QS stock in the eyes of the market?
This secondary offering, which will be dilutive to existing investors, came just a week after QuantumScape, in its quarterly update, reiterated that it has sufficient cash runway until at least the second half of 2025.
That statement suggested little-to-need to raise any additional funds over the next year or two. This apparent flip-flop regarding QuantumScape’s financing needs was not a good look.
Yet while the market looks like it has absorbed the impact of this development, keep in mind that, while QS is cheaper now, it is still not a bargain.
Mainly, because many factors are not adequately baked into the stock’s valuation. However, there may be a silver lining. It may not take much for this to occur. Here’s how.
What Needs to Happen
Although QS stock may start falling out of favor again, it continues to have one major indirect factor on its side. With inflation cooling, investors remain bullish that today’s high interest rates will not stay high for long.
Even as the Federal Reserve’s latest statements show that a “Fed pivot” is not just around the corner, the market has in recent months bid up growth stocks (highly sensitive to interest rates), in anticipation of a return to a lower-rate environment.
That said, with smart money investors like Michael Burry of ‘The Big Short” fame making big bearish bets during this rally, it’s possible that this market move was an overreaction, just waiting to be corrected. If such a correction happens, expect the most speculative of growth stocks (like QuantumScape) to be hardest hit if volatility strikes again.
Forget about merely a retreat back to QS’s 52-week low ($5.11 per share). If investor exuberance shifts back to a high level of pessimism and panic, this stock could easily fall deep into penny stock territory (under $5 per share). In such a scenario, I would be willing to alter my current bearish view on shares. Here’s why.
Wait at a Return to Under $5 per Share
At low single-digit prices, the risk/return proposition with QuantumScape will become far favorable. Down at rock-bottom prices, the numerous factors I hinted at above would become appropriately priced into QS.
This includes uncertainty over the company’s ability to not only develop, but produce on a massive scale, SSBs that offer the price, safety, and performance advantages that will make them a better choice than the lithium ion batteries predominantly used today to power EVs.
That’s not all. A sub-$5 per share price better accounts for the potential for additional shareholder dilution. A penny stock price will also account for what likely remains a long timeline to the production stage, not to mention the impact of rising competition in the SSB space.
Even if you’re more bullish on QS stock than I am, wait for this scenario to happen before putting money on the line.
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.
