Investors in QuantumScape (NYSE:QS) haven’t had much to cheer since the electric vehicle battery maker went public via a merger with special-purpose acquisition company Kensington Capital Acquisition in November 2020. On its first day of trading, QS stock soared nearly 50%. Less than a month later, shares hit a high of $132.73, 465% above where they opened on QuantumScape’s first day as a publicly traded company.
Today, QS stock is trading just below $16 a share. There’s been plenty of volatility in between, including a three-week, 75%-plus rally into the stock’s November high. But, for the most part, the traders making money from QuantumScape have been short sellers.
Yet, with QS stock hitting an all-time low recently, some investors may be considering buying shares as a long-term investment.
Let’s run through some of the pros and cons.
QuantumScape Is Broadening Its Use Case
QuantumScape develops solid-state lithium-metal batteries for electric vehicles. The company has 200 patents and patent applications relating to its battery technology. While rising interest rates may make it difficult for other non-revenue companies in the space to get financing, QuantumScape’s intellectual property and category leadership should carry some weight.
Moreover, a recent deal with Fluence Energy (NASDAQ:FLNC) will expand the company’s solid-state battery technology to stationary energy storage applications.
For a company that is still pre-revenue, I believe this is significant. As QuantumScape said in the press release accompanying the deal, “Stationary energy storage installations are expected to grow by more than 2,000% from 2020 to 2030, representing a $385 billion global market opportunity.”
And the company still has a partnership with Volkswagen (OTCMKTS:VWAGY). The automaker aims to have EVs account for half of its vehicle sales by the end of the decade.
Is Solid-State the New Betamax?
QuantumScape is not projected to start generating revenue from its existing solid-state battery technology until 2024. My biggest concern with QuantumScape isn’t the company’s ability to bring a product to market. It’s what the market will look like by the time solid-state batteries arrive. Perhaps this won’t be so much of an issue a few years from now, but it’s fair to wonder what the state of play in the EV market will be 10 years down the road.
The situation reminds me of VCR technology Betamax and its failure to catch on in the United States. It wasn’t that Betamax failed to do what it was designed to do. In fact, it was widely considered to be the best. But another product came along that was cheaper and better marketed, and that was the end of Betamax.
Already it’s clear that there will be more than one EV battery solution. Many electric vehicle manufacturers are committed to traditional lithium-ion batteries. Tesla (NASDAQ:TSLA) continues to make a considerable investment in this technology.
While there are limitations to lithium-ion batteries, the technology is evolving to provide the most range per charge. And there is an expectation that the charging station network will get beefed up. That has to happen whether it’s funded in part by the Biden administration’s infrastructure bill or not.
Meanwhile, Chinese EV maker Nio (NYSE:NIO) continues to move forward with its battery-as-a-service (BaaS) program. This is a different approach to removing range anxiety from the EV battery equation.
Class-Action Lawsuits Are a Red Flag
In addition to competition and the fact that solid-state batteries have still not shown they are commercially feasible, there’s another cause for concern with QS stock.
QuantumScape is facing a shareholder lawsuit. As InvestorPlace contributor Samuel O’Brient notes, “Shareholders are alleging that the company lied about both battery quality and performance-measuring tests.”
At worst, the suit will validate the skepticism of many investors since the company was brought public. At best, it’s likely to put downward pressure on QS stock until the lawsuit is resolved.
The Bottom Line on QS Stock
The first thing you need to understand with QuantumScape is that your risk of the company potentially going bankrupt is not zero. In fact, with the lawsuit it faces, it may be higher (in terms of percentage) than the single digits. That’s reason enough to keep a position in QS stock small.
However, speculative stocks are inherently gambles. But that doesn’t mean they aren’t gambles worth taking. Solid-state batteries may have a role as a niche offering. Even Betamax wound up having some success in Japan.
I like QS stock a lot better at $16 a share than I did when it was $40 a share and certainly more than I did when it was trading for over $100 per share. That being said, the lawsuit is enough to keep me away, but your risk tolerance may be different.
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.