QuantumScape (NYSE:QS) is a speculative growth stock, but this categorization isn’t what makes QS stock a questionable investment opportunity.
You know the saying: nothing ventured, nothing gained. If the odds are in your favor, taking calculated risks in early-stage stocks with a high degree of uncertainty can be a profitable strategy.
The issue with this electric vehicle battery technology play isn’t that the odds are long. Rather, the issue is that, at today’s prices, the odds aren’t in your favor.
QuantumScape may on the surface seem like a binary bet. Either the company brings a solid state battery (or SSB) for EVs to market, or it doesn’t.
But while shares would likely rally if the company were to hit the commercialization stage, there are additional factors that could make this stock a losing bet for those buying in at present price levels, as I’ll explain below.
QS Stock: ‘High Risk, High Reward?’
SSBs are a potential game-changer for the EV battery space. They offer range and safety advantages over the lithium ion batteries predominantly in use today.
If it becomes possible to build SSBs for EVs on a mass scale, chances are they will supplant usage of lithium ion batteries in a brief span of time.
This argument is why investors were willing to bid up QS stock to prices topping $100 per share during the height of “EV mania,” and it’s why many continue to dabble in shares. Even as they languish in the stock market graveyard.
Keep in mind that, while QuantumScape may finally have a breakthrough down the road, that doesn’t mean prices substantially above what QS trades for today (around $7 per share).
There are factors that could continue to weigh on the stock prior to a possible breakthrough. Plus, the market could react less favorably to a breakthrough than you would think.
Moderate Downside, Underwhelming Upside
QS stock investors may have realistic expectations when a possible “payoff moment” will arrive for shares.
These investors aren’t thinking that the stock could rally in a big way within the next few months or quarter. They know that it’s going to take years for the QuantumScape “story” to take shape.
Unfortunately, while “years” to some may suggest things begin to payoff within two to five years, that may not be the case. Many believe QuantumScape’s entry to the commercialization stage will arrive by the mid-to-late 2020s.
However, as one EV metals analyst (Rory McNulty) has argued, mass production of SSBs for EV may be around a decade away from happening.
With such a long timeline, impatience will undoubtedly weigh on QS shares. If that’s not bad enough, as I’ve pointed out previously in past QS articles, there’s a high chance of continued shareholder dilution with this stock.
The need to raise more funds in order to finance further development/commercialization of SSB technology is something else that will likely weigh on shares.
Yet even if McNulty’s forecast is too conservative, and that future dilution is moderate at worst, something else may limit QuantumScape’s ultimate upside potential: competition.
The Bottom Line
As I pointed out back in August, QuantumScape is far from being the only SSB contender out there.
Myriad companies, ranging from large, global powerhouses like Samsung SDI and Toyota Motor (NYSE:TM), to other SSB startups like Solid Power (NASDAQ:SLDP), are aiming to grab a piece of this potential market.
Some of these contenders could beat QuantumScape to the punch, gaining first-mover advantage, and limiting QS’s potential to capitalize on this technology.
Even if QS keeps pace, and rolls out its EV SSB at the same time, the high competition could hurt margins. Also, QuantumScape may have difficulty securing big-ticket end-users beyond its current strategic partner Volkswagen (OTCMKTS:VWAGY).
Taking all of this account, it’s easy to see why an investment in QS stock today could prove unprofitable, irrespective of the company’s success in the SSB space.
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.