Back in late June, I argued that QuantumScape (NYSE:QS) was at risk of a penny stock downfall. Since then, however, QS stock has done anything but tumble down to lower prices. Instead, shares in this electric vehicle battery technology company have rallied back to high single-digit prices.
However, while I’ve been proven wrong in the immediate term, don’t assume QS’s latest rally destroys my bearish thesis. Mainly, because the latest rally with this speculative growth stock has nothing to do with the company’s fundamentals.
Instead, it’s on the heels of news that is of very little relevance to QuantumScape and its future prospects. Pretty soon, if not already, this news will cease to have much of an impact on QS’s price action.
After this, my reversal thesis could begin to play out. As I’ll explain further below, here’s why.
What’s Driving the Latest QS Stock Rally
It’s not uncommon for QuantumScape shares to move on news indirectly related to the company. For instance, last month, shares rallied on news of automaker Toyota’s (NYSE:TM) plans to use solid state batteries (or SSBs) to power its battery electric vehicles.
SSBs are of course the type of EV batteries that QuantumScape is currently trying to develop.
The market eventually took the view that Toyota’s SSB news was more of a negative than a positive for QS stock, but initially, investors took the Toyota news as a sign of increased chances of SSBs becoming the EV battery predominantly used by automakers.
But while the Toyota SSB headlines at least had some relation to QuantumScape, it’s hard to argue that the indirect news boosting shares most recently has anything to do with the company.
While the fact that Tesla delivered more vehicles than expected last quarter may or may justify a boost for TSLA, and in turn other EV makers (due to greater-than-expected EV demand), in my view, this news changes nothing with QuantumScape’s overall story.
A Reversal Remains Likely
Years away from bringing its first SSB product to market, it makes little sense why Tesla’s strong sales today have any bearing on QuantumScape’s future prospects. With this, expect the latest rally driven by this news to soon fade. After that, attention will turn back to more relevant factors.
That’s bad news for QS stock, as it could drive a reversal for shares. In fact, some big news directly related to QuantumScape may be just a few weeks away. At the end of July, QS is expected to hold its next quarterly earnings release/investor update.
If it’s anything like the last quarterly results/investor update, the market is likely to be disappointed yet again, by news of higher-than-expected losses, and an investor update that does little to clear up the uncertainty surrounding the company’s timeline to commercialization.
That’s not all. After possibly coughing back recent gains post-earnings, there’s a strong chance QS remains in a continued slide to lower prices.
This could be due to bad news (such as the announcement of a dilutive capital raise), or due to a lack of news (such as a further lack of SSB development progress).
Stay Away as the Situation Remains Unchanged
Besides the big risks still inherent with QuantumScape, the rewards remain questionable as well. If EV makers like Toyota are deciding to build their own SSBs in house, QS’s addressable market continues to shrink.
There are also other companies much further with bringing SSBs to market, like China-based CATL. By the time QS reaches the production stage, it may struggle to lock down big ticket automakers, except for its strategic partner, automaker Volkswagen (OTCMKTS:VWAGY).
However, even if QuantumScape gets to a point where it has an SSB to mass produce and sell to VW, it’ll likely need to raise billions in additional capital to build out its production capacity. As I’ve pointed out previously, this could water down potential returns for QS investors.
With the overall situation unchanged, and its latest rally likely to give way to a massive pullback, keep staying away from QS stock.
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.