Stock Market

The Risk-Reward Ratio of QuantumScape Stock Is Unfavorable

Given QuantumScape’s (NYSE: QS) relatively high valuation and the fact that its batteries, in a best-case scenario, won’t be commercialized for many years, the risk/reward ratio of QS stock is unfavorable at this point.

Also worth noting is that investors are rather skeptical about pre-revenue companies such as QuantumScape in the current macro environment, while the outlook of QuantumScape’s batteries is still quite uncertain.

Investors who are looking for “millionaire-maker” stocks are much better off picking names whose products are much closer to actually being utilized in a practical manner.

A High Valuation and a Very Long Runway

Currently trading with a market capitalization of $6.35 billion, QS stock is already pricing in a great deal of success. Even if the company’s annual revenue down the road reaches, say, $200 million, the shares would still be changing hands for more than 12 times QuantumScape’s revenue. That’s an extremely high valuation.

Meanwhile, the company is not expected to begin generating revenue for four or five years. As a result,  it’s very difficult to imagine scenarios that would greatly boost QS stock over the next year or two.

During that time, there’s a good chance that QuantumScape will announce more successful tests and new partnerships. But the company has announced a meaningful number of such developments in the past year, yet QS stock has tumbled 31% so far this year and 50% in the last 12 months.

While I do anticipate that the  market will become much more favorable soon, I still do not expect successful tests and new partnerships to boost QuantumScape’s shares much going forward. With interest rates rising, most investors are looking for solid results, not better long-term prospects.

An Uncertain Outlook

Since QuantumScape’s batteries won’t be commercialized for many years, a great deal can go wrong for the company before its products reach the market. For example, serious safety problems with solid-state batteries could arise, as there are already indications that solid-state batteries may not be as safe as once thought.  And all sorts of technical and practical problems could  negatively affect QuantumScape’s batteries. before they reach the market.

Meanwhile, as I’ve warned in past columns, QuantumScape is facing significant  co9mpetition, as many companies are working on solid-state batteries. For example, Toyota (NYSE:TM) and Panasonic (OTC:PCRFY) are teaming up on solid-state batteries, while BMW and Ford (NYSE:F) are both working with a company called Solid Power on such batteries.

If it turns out that another solid-state battery is more efficient and/or safer than QuantumScape’s, there’s a good chance that its partners will ultimately adopt the superior battery instead of QuantumScape’s offerings.

Better Alternatives

Growth investors looking to bet on an emerging technology should buy the shares of companies whose products are highly likely to work very well or are already producing favorable results. And, in the current macro environment, it’s a good idea to buy the shares of companies that are already generating revenue or will likely to do so soon.

Among the firms that meet all of these criteria are Arrival (NASDAQ:ARVL), Stem (NYSE:STEM), Plug Power (NASDAQ:PLUG), and Bionano (NASDAQ:BNGO).

QuantumScape could plunge if there are problems with its batteries, but QS stock is unlikely to soar over the next year or two. Consequently, investors should sell QS stock.

On the date of publication, Larry Ramer was long BNGO stock, PLUG stock, ARVL stock, and STEM stock.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.