At first glance, electric vehicle (EV) battery technology company QuantumScape (NYSE:QS) might sound like a great business to invest in. After all, QS stock moved higher in November and early December. Yet, caution is definitely advised as QuantumScape’s financial shortcomings can’t be ignored.
Besides, as we’ll explain today, a prominent analyst firm published a low price target on QuantumScape stock. When all is said and done, cautious investors need to start off the new year with positions in rock-solid businesses, and QuantumScape just doesn’t make the cut.
Why Did QS Stock Rally Recently?
In November and the first half of December, the market was generally in risk-on mode. This was due to a perception that the Federal Reserve would ease up on its restrictive monetary policy next year.
Consequently, the market felt that risky businesses like QuantumScape could thrive during a regime of lower borrowing costs. In other words, QuantumScape stock didn’t rally because of any great company-specific news.
To confirm this, just take a look at QuantumScape’s press releases page. As of mid-December, QuantumScape hadn’t posted any updates since Oct. 25. This is, without a doubt, frustrating for the company’s investors if they’re seeking insight into QuantumScape’s operational progress.
For what it’s worth, QuantumScape did provide a third-quarter update in late October. Looking through the company’s Form 10-Q and shareholder letter, we can discover that QuantumScape “had not derived revenue from its principal business activities” (that’s from the 10-Q) and managed to lose $331.74 million in just three months.
QuantumScape May Need to Raise Capital Again
Earlier this year, QuantumScape enacted a share offering, presumably to raise capital. Frankly, there’s no other reason why QuantumScape would choose to print and sell stock shares, thereby raising dilution concerns.
Yet, this might not be the end of the story, as one analyst firm predicted that there may be another share sale coming. Not only that, but the analysts expressed dire concerns about QuantumScape’s subpar financial position.
In particular, analysts with HSBC see the “potential for cash burn to increase materially” as QuantumScape “scales based on what other battery makers have experienced.” Furthermore, HSBC analysts Wesley Brooks and Laisha Zaack “are also concerned about future dilution risk as it looks likely that QuantumScape will need to raise capital by late 2025.”
According to Brooks and Zaack’s calculations (per Seeking Alpha), QuantumScape isn’t “expected to generate meaningful revenue until 2027 or positive free cash flow until 2031.” Consequently, the HSBC analysts reduced the rating and set a pessimistic price target of $4.70.
No Need to Burn Your Portfolio With QuantumScape Stock
QuantumScape might not achieve full commercialization of its EV battery cell technology for a long time. In the meantime, the company continues to lose money and QuantumScape stock is vulnerable to dilution risk.
Honestly, hopes and dreams won’t be enough to build a valid bullish argument for QuantumScape. The company’s infrequent updates are frustrating, and QuantumScape’s financials are problematic. Therefore, QS stock is a no-go and should be avoided at all costs in 2024.
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.
