2020 has been a fantastic year for QuantumScape (NYSE:QS) shareholders, with the stock up more than 300% since the battery maker's public debut in late November. But the year is ending on a sour note, with the shares off about 10% on Thursday due to a pending secondary offering.
QuantumScape is developing a solid-state lithium-metal battery that in theory has a lot of advantages over the lithium-ion batteries currently in use, including lower costs, greater energy storage, and better safety and stability. But the battery is still years away from commercial rollout, and QuantumScape is competing against deep-pocketed companies including Toyota Motor.
Investors have jumped in, excited about the potential, but QuantumScape will soon have a lot more shares trading. The company updated an S-1 filing on Wednesday night registering more than 300 million shares, with at least 60 million not subject to any lockup agreement and able to be sold as soon as the filing gets the rubber stamp from the Securities and Exchange Commission.
More shares available typically means downward pressure on a stock. In this case it is existing holders, and not the company, selling shares, meaning QuantumScape would get no cash from the offering. But existing shares could feel some near-term downward pressure.
We'll likely know when the registration becomes official (probably sometime next week) when we see a spike in the volume of shares traded and probably another down day for the shares. It's hard to read too much into options pricing, but if options are to be believed some investors are pricing in the potential for the stock to lose $20 or more in the weeks to come.
Long-term investors should try to block out the noise concerning the secondary and focus on fundamentals. Unfortunately, it is hard to make the case that QuantumScape is appropriately valued based on fundamentals. The company has great potential, but the market in recent weeks has valued it higher than established companies including Ford Motor Company and Fiat Chrysler. That's tough to justify.
Truth is we won't know whether QuantumScape is a good investment, or a bust, for years. If the stock falls to a more reasonable valuation in the weeks to come, investors might want to consider making QuantumScape a small part of a diversified portfolio, hoping for the best, but this secondary will be nothing more than a footnote when the history of QuantumScape is written.