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QuantumScape (NYSE:QS) shares continue to remain under pressure from a confluence of bearish factors that have aggravated the ongoing correction in the stock.
As the stock hit a new zenith in the latter part of December 2020, we had noted in a post that QuantumScape shares were poised for a significant correction. That prognostication turned out to be particularly prescient. To wit, relative to the all-time high closing price of $131.67 on the 22nd of December, the stock is now down over 64 percent, currently trading at $47.13 in pre-market trading.
So, what has spurred this ferocious correction in QuantumScape shares? Firstly, as we noted in our previous post, the rally in the stock that preceded this decline was truly extraordinary. As an illustration, between the 01st and the 22nd of December, the stock registered a gain of over 270 percent, corresponding to a surge in QuantumScape’s market capitalization to $45 billion. Thus, the stock was ripe for a correction. Nonetheless, a number of factors seem to have soured the mood of investors.
QuantumScape filed an amended Form S-1 with the US SEC on the 30th of December 2020, registering 306 million (306,053,642) shares of its Class A common stock for resale by “selling securityholders”. It also registered 6.65 million private warrants to be exercised by these securityholders. Crucially, over 61 million of these Class A common shares were not subject to a customary lock-up period, allowing for their immediate liquidation. This Form S-1 was declared effective by the SEC on the 31st of December 2020, thereby pressuring QuantumScape’s stock price amid expectations of an incoming wave of liquidation.
To make matters worse, a few analysts have begun to publicly question QuantumScape regarding the feasibility of its solid-state batteries. As per the company’s claims, its batteries do not experience much degradation even at high rates of power (1C charge and 1C discharge at 30 degrees Celsius), having successfully retained over 80 percent capacity after 800 cycles. This translates to a Coulombic Efficiency (CE) of 99.97 percent. The company claims that its lithium-metal batteries are anode-free. What this means is that the lithium ions are extracted from the cathode and are then deposited (electroplated) on the anode current collector, forming a temporary anode during the initial charge cycle. The anode collector then slowly loses lithium during the discharge process. Bear in mind that these batteries do not utilize carbon or carbon/silicon anode. They also do not use excess lithium on the anode, boosting energy density in the process. By eliminating the side reaction between the liquid electrolyte and the carbon in the anode of conventional lithium-ion cells, QuantumScape’s product claims to provide an enhanced driving range for EVs.
Nonetheless, Brian Morin penned an article on Seeking Alpha on the 04th of January 2021, noting:
“They have done 1200 cycles of a 90 second OEM specified track simulation, which pulled pulses of 6C. In this track, 9 laps is full depth of discharge, when the battery was heated to 45 degrees C (113 degrees F) and charged to 80% in 15 minutes. The cell lost about 10% of its capacity in this 130 cycle test, meaning the battery will only last for 260 cycles or about 75,000 miles of aggressive driving.”
Mr. Morin then went on to note:
“In much gentler, 1C / 1C cycling at 30 degrees C, the cell makes it for 800 cycles, or 240,000 miles. Respectable, but not better than the vehicles on the road today.”
Crucially, Mr. Morin asserted that at lower temperatures (-10 degrees Celsius), QuantumScape’s batteries would only be able to charge to 5 percent capacity in 15 minutes instead of the claimed 80 percent capacity.
To make matters worse, on the basis of this article by Mr. Morin, Ademi LLP has now initiated an investigation related to securities fraud possibly perpetrated by QuantumScape. The firm noted in its press release:
“The investigation focuses on whether QuantumScape properly disclosed the significant limitations of its solid-state battery products in order to be acceptable for real world field electric vehicle performance. Specifically, according to a Seeking Alpha research report, QuantumScape's solid state battery products (i) last only for "260 cycles or about 75,000 miles of aggressive driving", (ii) have a daily range of only about "75-100 miles at full capacity in winter temperature conditions", (iii) will charge only to 5% in 15 minutes rather than 80% at 15 minutes in winter conditions, and (iv) will have an energy density lower than competitors.”
This brings us to the crux of the matter. QuantumScape is not expected to commercially launch its products until at least 2025. This extended time horizon to product delivery corresponds to outsized holding risk. While we expect most of these issues to resolve soon, provided that QuantumScape has its proverbial hands clean, the current weakness is likely to persist until the company’s findings are able to be verified by third-party experts. Of course, QuantumScape’s strong backers do enhance confidence in the company. As a refresher, earlier in December, Qatar Investment Authority (QIA) – the country’s sovereign wealth fund – disclosed a stake of 14.308 million (14,308,051) QuantumScape Class A common shares. Moreover, in June 2020, Volkswagen increased its stake in the company by $200 million. Additionally, QuantumScape also enjoys backing from Microsoft's (NASDAQ:MSFT) founder Bill Gates, German auto supplier Continental, Chinese automaker SAIC Motor, and a number of venture capital firms.