The pre-revenue solid-state battery technology company QuantumScape Corporation (QS) incurred huge losses during the first quarter of fiscal 2023. Furthermore, the company expects to incur significant operating expenses and continued losses in the foreseeable future. Also, intense competition in the EV battery market could affect QS’ business or financial condition.
Given its bleak fundamentals and grim growth outlook, QS is best avoided now. In this article, I have discussed several reasons why investing in this auto parts stock could be extremely risky.
With a $2.95 billion market cap, QS is a development stage company that focuses on the development and commercialization of solid-state lithium-metal batteries for electric vehicles (EVs) and other applications. These solid-state batteries are designed to offer greater energy density, faster charging, and enhanced safety compared to today’s conventional lithium-ion batteries.
According to a report by Expert Market Research, the global EV battery market is projected to reach 109 billion by 2026, growing at a 19.2% CAGR. As the demand for EVs is increasing considerably across the globe, so is the need for EV batteries.
The government’s growing focus on rapid electrification to limit the dependence on fossil fuels and to fight climate change are a few of the main factors boosting the adoption of EVs worldwide. Countries are increasingly promoting EVs as gasoline-powered internal engine (ICE) vehicles, have heightened environmental concerns.
QS continues to make progress in developing its battery technology with the goal of commercialization through the production of C-sample battery cells made available to a third party. The company demonstrated the capabilities of its solid-state separator and battery technology in single-layer and multi-layer cell cycling data.
Last year, QS shipped its first 24-layer A0 prototype battery cells to various automotive OEMs for testing. Following this shipment, the company plans to focus on its research and development (R&D) on subsequent generations of prototype samples incorporating advances in cell functionality, process and reliability, and bringing online the manufacturing capability of its QS-0 pre-pilot production line.
While QS’ next-generation battery technology for EVs has the potential to capitalize on the EV industry’s bright growth prospects, the company has generated no revenue to date as it is yet to commercialize its product. This pre-revenue company incurred a net loss from operations of approximately $110 million for the first quarter that ended March 31, 2023.
In addition, QS incurred an accumulated deficit of approximately $2.50 billion from its inception in 2010 through March 31, 2023. Further, the company is expected to incur considerable expenses and continuing losses for the foreseeable future.
Immense competition in the EV industry, particularly the battery segment, is also a major headwind for the solid-state battery technology company. With the introduction of new technologies and the potential entry of new competitors into the EV battery market, increasing competition could harm QS’ business, results of operations, or financial condition.
Shares of QS have declined 30.5% over the past year to close the last trading session at $6.64. Furthermore, Wall Street analysts expect the stock to hit $5.00 in the near term, indicating a downside of 24.7%.
Here are some factors that could influence QS’ performance in the upcoming months:
Deteriorating Financials
For the first quarter that ended March 31, 2023, QS’ loss from operations widened 21.3% year-over-year to $109.98 million. The company’s net loss attributable to common stockholders worsened by 15.8% over the prior-year quarter to $104.65 million, and its net loss per share widened by 14.3% year-over-year to $0.24.
Furthermore, the company’s cash outflow from operating activities was $62.32 million, up 31.5% year-over-year. Also, as of March 31, 2023, its current liabilities and total liabilities stood at $43.52 million and $152.47 million, respectively.
Unfavorable Analyst Estimates
Analysts expect QS to report a loss per share of $0.19 for the second quarter (ending June 2023). Moreover, the company failed to surpass the consensus EPS estimates in three of the trailing four quarters, which is disappointing.
In addition, the company is expected to incur massive losses for at least two fiscal years.
Low Profitability
In terms of the trailing-12-month Return on Common Equity (ROCE), QS’ negative 30.53% compares to the industry average of 10.21%. Likewise, its trailing-12-month Return on Total Capital (ROTC) of negative 18.33% is lower than the industry average of 6.10%. Also, the stock’s negative 30.20% trailing-12-month Return on Total Assets (ROTA) compares to the 3.63% industry average.
Furthermore, the stock’s trailing-12-month cash from operations of negative 232.94 million compares to the industry average of 193.45 million. And its trailing-12-month cash per share of 0.54 is 77.5% lower than the 2.42 industry average.
POWR Ratings Show Weakness
QS has an overall F rating, equating to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. QS has an F grade for Sentiment, in sync with its disappointing analyst expectations. In addition, it has a D grade for Quality, consistent with its lower-than-industry profitability.
Also, the stock has a D grade for Stability. Its 24-month beta of 2.32 justifies its Stability grade.
QS is ranked last among 58 stocks in the Auto Parts industry.
Beyond what I have stated above, we have also given QS grades for Value, Growth, and Momentum. Get all QS ratings here.
Bottom Line
With the rapid adoption of EVs worldwide, the demand for efficient, fast-charging, long-lasting batteries is increasing. While the EV industry’s solid outlook should benefit QS significantly, the company is yet to commercialize its batteries. The solid-state battery manufacturer has generated no revenue and incurred massive losses so far.
Furthermore, the company is expected to incur considerable expenses and continued losses in the upcoming quarters. Given QS’ disappointing financial performance, poor profitability, and dim growth outlook, it could be wise to avoid this stock now.
Stocks to Consider Instead of QuantumScape Corporation (QS)
The odds of QS outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three stocks rated A (Strong Buy) from the Auto Parts industry instead:
Modine Manufacturing Company (MOD)
Garrett Motion Inc. (GTX)
Commercial Vehicle Group, Inc. (CVGI)
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
QS shares rose $0.07 (+1.05%) in premarket trading Tuesday. Year-to-date, QS has gained 17.11%, versus a 13.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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