Solid-state lithium-metal batteries developer QuantumScape Corporation (QS) made its stock market debut in November 2020 via special purpose acquisition company (SPAC) Kensington Capital Acquisition Corp. QS is backed by investors such as Volkswagen AG (VWAGY) and Bill Gates. Its shares have soared 16% over the past month. The stock rallied 26.6% last week primarily because of the company’s announcement on September 21 that it has partnered with an undisclosed large automaker to evaluate prototypes of its solid-state battery cells.

However, the stock has lost 15% over the past three months and 40% over the past six months. QS’ loss from operations increased 248.8% year-over-year to $49.62 million for the second quarter ended June 30, 2021, while its loss per share came in at $0.12, up 100% year-over-year. According to an SEC filing, the company’s Director Justin Mirro sold 20,000 shares on September 7. Hedge funds look less bullish about the stock lately. Moreover, QS is not expected to begin commercial production until 2024. So, the stock’s near-term prospects look bleak.

Here’s what could influence QS’ performance in the near term:

Intense Competition May Limit Growth

Even though QS boasts of its advanced technology, Solid Power, which is expected to make its stock market debut merging with SPAC Decarbonization Plus Acquisition Corp III, has eight years of technology development and three years of manufacturing development experience. In addition, Toyota Motor Corporation (TM) is also engaged in developing solid-state batteries and is backed by the Japanese government. So, QS’ growth could be limited.

Unfavorable Short Seller Report

QS’ shares plunged sharply in April 2021 after activist short-seller Scorpion Capital accused the company of being a ‘pump and dump SPAC’ scam. The report mentioned, “We conducted 15 in-depth research interviews, including 9 former R&D employees, 4 leading solid-state battery experts, and 2 employees in Volkswagen’s EV battery effort. Our research leads us to conclude that the company is no different than other recently exposed SPAC promotions and EV frauds.”

Ongoing Investigation

Several law firms have launched investigations against QS on potential violations of the Securities Exchange Act of 1934. It is alleged that the company made false and misleading statements to the market. For example, it dramatically overstated the purported success of its solid-state batteries, including their battery power, life, and energy density. Also, it was unlikely to scale its battery technology to the multi-layer cells necessary to run EVs.

Poor Profitability

In terms of trailing-12-month ROCE, QS’ negative value compares to the industry average of 17.66%. Likewise, the stock’s trailing-12-month ROTC and ROTA are negative compared to the industry averages of 7.56% and 6.28%, respectively. Also, its trailing-12-month cash from operations is negative compared to the industry average of $208.96 million.

POWR Ratings Reflect Bleak Prospects

QS has an overall F rating, which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. QS has a D grade for Quality, consistent with its lower-than-industry profitability ratios.

The stock has a D grade for Sentiment and an F grade for Growth. This is justified as analysts expect QS’ EPS to remain negative in fiscal 2021 and 2022.

Moreover, QS has an F grade for Value, in sync with its forward P/B of 7.71x, 116.6% higher than the industry average of 3.56x.

In addition to the POWR Rating grades I’ve just highlighted, we’ve also rated QS for Stability and Momentum. Get all the QS ratings here.

QS is ranked #66 out of 67 stocks in the B-rated Auto Parts industry.

Bottom Line

QS is one of the famous companies in the growing solid-state lithium batteries industry. However, it continues to face intense competition, and investigations are going on against the company. Moreover, it is yet to generate revenues, and its EPS is expected to remain negative in the upcoming quarters. So, the stock is best avoided now.

How Does QuantumScape (QS) Stack Up Against its Peers?

While it could be wise to avoid QS now, you could consider investing in the following A-rated (Strong Buy) stocks in the Auto Parts industry: Bridgestone Corporation (BRDCY), LKQ Corporation (LKQ), and DENSO Corporation (DNZOY).

QS shares were trading at $25.47 per share on Wednesday afternoon, up $0.20 (+0.79%). Year-to-date, QS has declined -69.84%, versus a 17.27% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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