It’s safe to say the jury is still out whether QuantumScape (NYSE:QS) will revolutionize electric vehicle battery technology. However, when it comes to QS stock itself, we may already have a verdict.
It’s possible this company will bring solid-state EV batteries to market, but it may be all but certain that QS turns out to be a dud of an investment.
I’m not saying that there is a strong likelihood that QuantumScape fails in its mission. Rather, irrespective of whether it flounders, additional losses may lie ahead. It all has to do with this one key factor.
Why QS Stock is Riskier Than Other Stocks
Investing in early-stage growth stocks always comes with a high level of risk. With QS stock, there’s not merely the uncertainty about growth or the uncertainty about profitability.
With this upstart, there is high uncertainty about whether it can even bring out a marketable product.
As I have discussed previously, the timeline to rolling out its solid state EV batteries remains very vague, although some recent developments suggest that the company will within a reasonable time frame bring a non-EV battery product to market. That’s not all.
It’s not merely a matter of this company putting in the work/investing the capital to turn its “big idea” (safer batteries with greater driving range) into a commercially viable product.
As InvestorPlace’s Dana Blankenhorn put it back in May, “engineering to scale scientific theories” is a lot easier said-than-done. That said, even if the company overcomes this challenge, don’t assume shares will quickly re-enter the fast lane.
The One Key Factor
By now, you may wonder what is this “key factor” I keep hinting at. It’s something I’ve discussed extensively: dilution from additional capital raising. Yes, dilution is par for the course for a company working to scale into a profitable enterprise.
Sometimes, the initial dilution from capital-raising can be more than made-up-for down the road. In those situations, additional cash enables a company to make the leap from unprofitable startup to profitable, established enterprise.
Unfortunately, QS appears likely to end up being a situation where high dilution outweighs future progress.
Management has stated QuantumScape has enough cash on hand to last it until late 2025. However, like we’ve seen with other pre-revenue EV companies, current estimates could always change. It’s worth noting that QS has an open $400 million shelf offering, in the event it needs/wants to raise more cash. For reference, QS currently has a market cap of $2.8 billion.
Risk/Reward Getting Less Favorable
Sure, the sale of another $400 million worth of shares doesn’t sound like a big deal to those very bullish on QuantumScape. In their view, an approximately 14.3% increase in QS’s share count won’t matter. Bringing solid state batteries to market will make this company worth many times what the market values it at today.
However, it’s not as if $400 million is the total amount of additional cash QuantumScape will need to raise. QS may end up having to raise many times its current market cap in order to enter the full production stage.
Also, consider that QS’s larger, more established competitors are also working to build a better EV battery. This too could limit this company’s market share potential with its EV battery contender.
As the risk/reward proposition keeps getting less favorable, keep skipping out on QS stock.
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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