What happened

Battery start-up QuantumScape (QS -0.48%) was one of the more successful electric vehicle-related companies that went public via a special purpose acquisition company (SPAC) in 2020, with its stock quickly jumping more than 400%. In April QuantumScape was hit by the other trend impacting auto SPACs, a critical short report, and the stock fell 18.3% for the month as a result, according to data provided by S&P Global Market Intelligence.

So what

QuantumScape is developing a solid-state battery that would be a huge improvement over the lithium-ion batteries currently used to power electric vehicles, but its tech is still years away from commercialization. It has some high-profile backers and counts Volkswagen (VWAGY 1.90%) as both an investor and a customer, but given the challenges involved in solid-state batteries, it is not a lock for success.

An illustration showing the inner workings of an electric vehicle.

Image source: Getty Images.

The bloom has been fading, with the stock off 18.5% in March. The selling intensified in mid-April after short-seller Scorpion Capital called QuantumScape a "pump and dump SPAC scam" that has made scientific claims that are fraudulent or misleading. Scorpion compared QuantumScape to now-disgraced medical start-up Theranos.

Short-sellers see opportunities in these high-flying auto SPACs. Last year Hindenburg Research was able to ground Nikola (NKLA 4.57%) after proving that the start-up truck maker had faked some of its accomplishments. In March Hindenburg turned its attention to Lordstown Motors (RIDE 18.52%), calling a lot of the young company's claims into question.

Given the success Hindenburg had with Nikola and the negative stock reaction following the Lordstown report, investors ran for the exits after the QuantumScape report.

Now what

QuantumScape has denied Scorpion's claims, with CEO Jagdeep Singh appearing on CNBC soon after the report surfaced to defend his tech. It's now a battle of rhetoric, and it is impossible for investors to know for sure who is telling the truth.

I'm confident in Volkswagen's due diligence and believe it highly unlikely that the German automaker would remain committed to QuantumScape if they weren't seeing progress in developing the technology. Then again, solid-state batteries have long been the goal of electric vehicle makers but have proven very difficult to mass-produce in a commercially viable way, and there is no guarantee QuantumScape will end up figuring it out either.

While I believe in the potential of the tech, I can't justify the way the stock spiked after QuantumScape went public. Even after the sell-off, the stock is still up more than 50% from its start. For investors who understand the risk and want to make QuantumScape a small part of a well-diversified portfolio, I still believe QuantumScape could be a big success. Just be warned that at best it will take time and at worst the company will never get all the pieces to fit together.