With its Recent Rally Running Out of Juice, Hold off on Quantumscape Stock

Stock Market

For the past month, EV battery maker Quantumscape (NYSE:QS) has been on a tear. Like other EV and EV-related plays, QS stock got a big boost from news of the U.S. Congress passing its trillion-dollar infrastructure bill, and President Biden signing it into law.

A sign for QuantumScape (QS).

Source: Michael Vi / Shutterstock.com

But after buying the rumor, and buying more on the news? Investors are starting to take their foot off the accelerator. For this name in particular, this has meant a pullback in price. After surging from around $24 to as much as $43 per share, between mid-October and Nov 15, the stock is back down to around $36 per share.

“Buy the dip,” some may say. After all, this company, which is looking to bring solid-state electric vehicle batteries (with their numerous advantages) to market, stands to one day generate billions in sales. However, with so much of its upside already factored in at today’s price, Quantumscape has “priced for perfection” written all over it.

Yes, this by itself isn’t a problem. However, with its long timeline to commercialization? Paying up for this name so early before its “payoff moment” doesn’t appear to be the best move.

QS Stock, The Pullback, and A Recent Analyst Downgrade

The cool-down in the latest wave of “EV Mania” (due to the infrastructure bill) is what sparked its pullback. Another recent development, however, is helping to sustain it: a recent downgrade, from Morgan Stanley’s Adam Jonas.

The prominent sell-side analyst changed his rating on QS stock from the equivalent to “buy,” to the equivalent to “hold.” What is his main concern? Competition. Specifically, the risk that, by the time this company brings its batteries to market, advancements in battery technology will make its offerings not as cutting edge as they are today.

Besides calling into question the argument that Quantumscape will ultimately dominate the EV battery market, it further highlights the key issue with this company: a long timeline to moving out of the pre-revenue stage. Even among EV stocks, this one’s “payoff” moment is far into the future. This adds plenty of uncertainty.

Not just with regards to rising competition. During this timeframe, it could cease making progress with the development of its technology. Success so far with milestones doesn’t guarantee it’ll make it to the finish line. To top it all off, it’s possible shares could struggle going forward. Even as the company gets closer toward bringing its flagship product to market.

Shares Could Slide Further, Despite Continued Progress

In hindsight, the recent concern brought up by Adam Jonas about QS stock could prove to be overblown. Competition may heat up between now and 2025. But between having Volkswagen (OTCMKTS:VWAGY) as a partner, and the overall expected boost in demand for EV batteries, the company could still see tremendous success, without necessarily dominating the market.

However, don’t assume that living up to expectation means that Quantumscape shares will rise in value. In the next few years, it could finally bring its batteries to market. In turn, going from generating zero, to billions, in annual sales. But instead of making its way to $50, $75, or even back to its all time-high of $132.73 per share? The stock could instead deliver middling returns from here.

Why? There’s the possibility that the EV Bubble winds up playing out a lot like the Dotcom Bubble. At least, according to CNBC’s Jim Cramer, who implored his viewers to take some risk off the table with high-flying EV names such as Lucid Group (NASDAQ:LCID) and Rivian (NASDAQ:RIVN). The reason? Just like what happened to tech names after the Dotcom Bubble burst, EV stocks could deliver underwhelming performance for several years. Despite continuing to deliver above-average levels of growth.

Granted, Cramer is not the first to make this argument. He was also talking about LCID and RIVN in particular. But I believe the argument applies to this name, plus other EV-adjacent plays, such as ChargePoint (NYSE:CHPT). While trends may be on their side, don’t take that to mean their respective share prices will continue to trend higher.

The Verdict: Even if Bullish, Sit Things Out For Now

Admittedly, I lean towards the bearish side when it comes to the EV megatrend. With this, I’ve been proven wrong many times this year, as the EV bubble, seemingly on the verge of popping, finds more runway.

If this carries on, short-term traders may still be able to profit from its sharp movements higher and lower. But this is a strategy that will work until it doesn’t (i.e. when the “EV bubble” ends just like the Dotcom bubble did). Ahead of it dropping in price when said bubble finally bursts/deflates, even if bullish, sit out on QS stock for now.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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