After months of trading sideways, EV battery maker Quantumscape (NYSE:QS) has seen a big jolt in its share price. Thanks to the passage of the U.S. infrastructure bill, and progress with setting up its manufacturing operations, QS stock is up over 71% in the past month.
As this latest run-up wraps up, could $35-$40 per share become the new floor for shares? Not so fast. Years away from the commercialization stage, there are three ways the stock could pull back after its recent turbo-charged spike.
First, shares could dip due to a bit of negative company-specific news. Second, investor impatience may result in a big drift lower. Third, there’s still the looming risk that interest rates rise, negatively affecting growth stocks like this one.
So, what’s the best now for shares? Investors who smartly got in ahead of the bill passage should cash out. If you aren’t in that category, and have yet to enter a position? Definitely sit this one out right now.
QS Stock and The Infrastructure Bill
It’s not as if Quantumscape was lacking in positive developments before the recent news. Back in September, shares got a bit of a boost from news that another major automaker was joining Volkswagen (OTCMKTS:VWAGY) in becoming a partner with this early stage “future of EV batteries play.”
But the “game changer” level of that development for QS stock pales in comparison to the possible upside resulting from the above-mentioned infrastructure bill. Although just a small portion of the package is going toward EV-related initiatives, it could go a long way in enabling electric vehicles to achieve critical mass.
With funding included in the bill to expand the number of EV charging stations to 500,000 by 2030, it will in time become even easier to convince the public to make the switch to EVs. Better yet, this company could be the one that helps solve a key challenge preventing electric vehicles from becoming a full-on substitute for gas-powered ones: battery limitations.
Today, the predominant types of batteries used to power EVs (lithium ion) have many disadvantages. These include limited range, long charging times, as well as the risk of being a fire hazard. However, Qunatumscape isn’t producing lithium-ion batteries. Instead, it’s making solid state batteries, or SSBs. Not only do they offer greater safety and longer range. They also have shorter charging times as well. The incredible run shares have gone on due to this news is warranted. However, as explained below, don’t take this to mean that the stock’s days of high volatility are over.
Three Ways Shares Could Stumble to Lower Prices
In the immediate future, QS stock may be able to stay at its current elevated price (around $39.10 per share). Other early stage EV names, such as automakers like Fisker (NYSE:FSR) and Lucid Group (NASDAQ:LCID), are still trending higher.
But a few weeks (or months) from now? This may no longer be the case. As mentioned above, there are three ways for shares to stumble back toward prior price levels. A bit of negative news, for example, any sort of hiccup/setback that causes it to delay its commercialization timeline.
So too, could investor impatience. The infrastructure news certainly bodes well for Quantumscape. Yet it won’t be until 2024 or 2025 that the anticipated boost in demand thanks to the Federal Government’s financial support will translate into tangible benefits for the company.
Lastly, something I’ve talked about that’s a risk for growth stocks in general is a risk for QS stock as well. That would be rising interest rates causing multiple compression. Low interest rates have played a big role in sending early stage companies to rich valuations, and keeping them there. This however could change, if high inflation forces the U.S. Federal Reserve to start its so-called “interest rate liftoff” in 2022 rather than in 2023.
Depending on how quickly it happens, if rates rise, it could have an inverse effect on growth stock prices. This is because higher rates lower the present value of future hypothetical cash flows, pushing their shares to lower prices.
Bottom Line: No Need to Chase The Recent Quantumscape Run-Up
The recent infrastructure bill news signals things are moving along for the EV industry. In the coming years, demand for electric cars will speed up. During this timeframe, Quantumscape will also be ready to bring its SSBs to market. With two of the largest automakers signing on as its partners? It could be a quick path to billions in annual revenue.
Still, it could experience some challenges along the way, take too long to have its “payoff moment,” or simply get caught up in a possible growth stock correction. All things considered, it’s best not to chase the latest QS stock run-up, and instead wait for lower prices.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.