QuantumScape (NYSE:QS) briefly spiked earlier this month, but since then QS stock has coughed back these gains, and for a good reason.
QS moved on misperceived good news, but the market has wised up. Investors now seem to share my view that this news is potentially harmful for QuantumScape’s long-term prospects.
If that’s not bad enough, after whipsaw moves thus far in June, the months ahead could prove brutal for those who either hold QS today, or plan on buying it soon.
Despite already dropping significantly in price over the past two-and-a-half years, shares could soon experience what I like to call a “penny stock downfall.”
I’m not saying the stock will soon be trading for literal pennies, yet the level of losses will nonetheless likely be painful.
QS Stock: Not the Greatest News
In my last QuantumScape article, I discussed how its most recent rally was driven not by any company-related news, but news related to solid-state EV batteries. These are the type of batteries that this upstart is looking to someday build on a massive scale.
Solid-state batteries are regarded to be safer, stronger and cheaper than the lithium-ion batteries currently in use. Questions remain whether they will one day become widely used to power EVs.
However, some of this uncertainty has cleared up, with Toyota’s (NYSE:TM) recent announcement that it plans to build its own SSBs for its electric cars, trucks and SUVs.
While the market first saw this as good news for QS stock, I saw it differently. In my view, Toyota throwing its hat into the SSB ring was something that could limit QuantumScape’s ultimate growth potential. Over the past week, it seems market participants were shifting to a similar conclusion.
After surging from just over $7 to nearly $8 per share, QS has given back its gains, and then some. If that’s not bad enough, another factor playing a role in this reversal could drive further price declines.
Penny Stock Downfall
While the Toyota news helped to give QS stock a short-lived jolt, it’s been the market’s move in recent months back to a “risk-on” mindset that has helped provide a great deal of support for shares.
Easing worries about inflation and interest rates makes investors more willing to pay up for stocks valued primarily on future potential, like QuantumScape. Unfortunately, based on the latest macro-related news, it’s possible that “risk-off” will soon come back into style.
According to economists at JPMorgan, as high inflation continues into 2024, so too will fiscal tightening (aka interest rate hikes). This could cause a severe global economic downturn.
If the number of investors buying into this thesis keeps climbing, stocks may correct again, in anticipation of this potential “hard landing.”
This will of course hit stocks across-the-board, but speculative growth plays like QS will be especially hard-hit. If a shift in broad market sentiment is coupled with a lack of SSB development progress (or worse, disappointment), QuantumScape shares could easily tumble deep into penny stock territory (prices well below $5 per share). Even if QS shares slide downhill again, it still may not be all uphill after that.
No Reason to Bottom-Fish Here
Following another extended plunge for QuantumScape, shares could still struggle, no matter the outcome. It goes without saying that if QS cannot make more progress bringing SSBs to market, a move to literal pennies per share would be all but inevitable.
Yet even if the company makes progress, and gets to where it’s building SSBs at a massive scale, don’t assume this will result in an epic rebound for this stock.
As I also pointed out in my last QuantumScape article, shareholder dilution from the capital raises likely necessary to bring this company to the production stage could mean middling, if not negative, returns for shares.
QS stock risks experiencing a big drop in the near-term, with slimming chances of a big rebound in the long-term. With this, there’s no reason to bottom-fish here. As before, consider it wise to stay away.
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.