Zooming higher to the tune of 12.25% on May 22 and holding steady at yesterday’s close QuantumScape (NYSE:QS) stock may be popping back on your radar.
To some, this sharp spike in the price of QS stock may seem like a sign that a comeback for shares in this electric vehicle battery technology company is taking shape.
However, there’s little to indicate that this is the case. In the immediate term, the stock could continue to rally, but chances are it’s a matter of “when” rather than “if” this rally reverses course.
Once key issues are top of mind amongst the market, the stock will cough back these gains, and drift back to prior levels. If that’s not bad enough, these issues are set to persist. With this, a move to even lower prices may be in store.
| QS | QuantumScape | $6.65 |
Why Did QS Stock Rally This Week?
Typically, a double-digit move higher for a stock comes on the heels of a major company announcement, or from news headlines that indirectly bode well for the prospects of the underlying company.
Yet for QuantumScape’s rally this week, it is difficult to chalk it up to recent news/developments.
There have been few headlines about QS stock so far this month. In fact, most of the more recent headlines came about in late April, when this upstart last reported quarterly results.
With shares moving higher on zero news, that leaves one other likely driver of this rally: renewed enthusiasm about a possible short squeeze.
According to Fintel, around 20.23% of QS’s outstanding float has been sold short. Even if there’s a lack of news, a sudden inflow of buying can sometimes drive such a move.
Whatever the root cause, as of this writing, it’s unclear whether this rally will fizzle out within one trading day, or if it has the potential to extend for several trading days. Nevertheless, steering clear is your best move. Here’s why.
The Bear Case Is Stronger Than the Bull Case
Still in the pre-revenue stage, as it works to turn its solid-state battery technology into a scalable product, current results cannot justify the current market cap of QS stock ($3 billion).
However, a few years down the road, if QuantumScape’s batteries make it to market, this company could not only justify a $3 billion market cap, but perhaps justify an even higher valuation.
Despite this promise, though, other factors point to the bear case being stronger than the bull case.
For one, QuantumScape has recently updated the investing public on its progress, yet has remained vague in providing an updated timeline to commercialization. It’s also far from a given the company’s efforts result in a salable product.
That’s not all. As I argued earlier this month, QuantumScape will likely need to raise billions more to fund further development and commercialization. Dilution from additional capital raising will reduce upside potential, creating a less favorable risk/return proposition.
Your Best Move
Whether short-squeeze speculation, or something else unrelated to fundamentals, whatever is driving QuantumScape’s latest rally will likely soon fizzle out. Because of its popularity with retail speculators, QS has a history of experiencing big-but-temporary surges in price.
Barring the release of some unforeseen game-changing news from the company, once the latest frenzy fades, the aforementioned issues (hazy commercialization timeline, dilution risk) will come off the back burner.
When that happens, QS is very vulnerable to snap back to lower prices. It likely will not take much to send shares back to the mid-single digits.
In the months ahead, as reaching the production stage remains far away, and cash burn continues, the stock could re-hit its 52-week low ($5.11 per share), and slump even lower, as dilution concerns intensify.
With this, there’s only one proper move to make with QS stock: sell/avoid.
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.