I have long taken a bearish view on QuantumScape (NYSE:QS) stock. However, while I’m not a fan at $10 per share, $7.50 per share, and even now at just over $5 per share, QS is steadily approaching the “buy zone.” The company provided an investor update in its recent earnings release that was adequate. As a result, shares slid lower post-earnings. As of this writing, they continue to trend downward.
At the same time though, while the latest updates may not be exciting, they may suggest the chances that QuantumScape ultimately strikes commercial success with its solid state EV batteries have not changed. Risk/return with this former “hot stock” may be on the verge of finally becoming favorable.
QS Stock and the Latest Investor Update
On Oct. 25, QuantumScape released its results for the quarter ending Sep. 30, 2023. Given the pre-revenue status of this company, while technically a quarterly earnings release, the focus is not so much on the results themselves, but on updates regarding the company’s efforts to develop and sell SSBs for EVs.
In a shareholder letter that accompanied the latest numbers, QuantumScape’s management provided the latest info on product development and testing, customer engagement, and the ramp up of manufacturing capacity. Of greater pertinence to QS stock investors, management also provided an update on cash burn and cash runway.
Again, while there were few disappointments, there were also few big game-changing surprises. While providing an update on its SSB development efforts, as well as efforts to bring out a battery product for the customer electronics market, QuantumScape remained vague about its commercialization timeline.
While reiterating that it is well-capitalized for the near-term ($1.1 billion in liquidity, forecasted cash runway now extended to 2026), the investor letter did suggest additional capital raising could occur in the nearer-term. In turn, hinting that the longstanding shareholder dilution issue with QS has not lessened.
Pulling Back, but Odds Becoming More Favorable
As a high-risk/high potential reward type of play, generating long-term profits from an investment on QS stock hinges heavily on buying when the odds are more in your favor. When are the odds in your favor?
This will occur, the stock price properly accounts for a myriad of risks (competitive risk, dilution risk, execution risks), as well as properly discounts for the time necessary for the company to (possibly) hit the “success stage.” Even at current prices, QuantumScape has yet to hit that point.
However, Volkswagen (OTCMKTS:VWAGY), QS’s strategic partner, is still a likely buyer of its technology if/when it’s ready for mass production. Although I’ve argued that Volkswagen is struggling in the EV market, the commencement of SSB sales to VW would undoubtedly lead to billions in revenue and possibly a fast track to profitability. This would likely lead to a move back toward higher price levels.
If upside potential stays constant, while a further discounting occurs, QS could finally fall to a “buy zone” price. At what level would I consider shares to be within the “buy zone?” $3 per share. Here’s how I came to this figure.
Currently, QS trades at a 75% premium to book value. Still, given the risky nature of this industry, this stock should trade at a discount to book. For instance, another fledgling SSB startup, Solid Power (NASDAQ:SLDP), trades at a massive discount to book value.
You don’t necessarily need to wait for QuantumScape to become as cheap as Solid Power, but you may want to at least wait for the stock price to fall below book value (around $3 per share).
Even with QS’s big drop in recent months, you may question whether the stock might become that cheap. However, as the stock’s popularity with retail traders keeps failing, and as high interest rates keep growth stocks out of favor, a slide to such lowly price levels is possible.
With this, keep an eye on QS stock, as it may just well sink to a much more favorable price.
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.