What happened

QuantumScape (NYSE:QS) stock is crashing Tuesday morning, having lost as much as 10% in value as of 12:15 p.m. EST.

The electric-vehicle battery stock has been on fire ever since President Joe Biden's $1.2 trillion infrastructure bill was passed. With Biden even signing the landmark bill into law later the afternoon of Nov. 15, you'd have expected QuantumScape stock to soar even higher today. It might have, if not for a huge analyst downgrade that's even overshadowed a milestone the company hit this very morning.

So what

This morning, Morgan Stanley analyst Adam Jonas downgraded his rating on QuantumScape stock and slashed his price target to only $40 a share from $70 per share -- yes, that's a whopping 43% cut. The stock is hovering  around $36.5 a share as of this writing.

To be sure, analyst stock upgrades and downgrades are a regular affair, more so for stocks that have moved a lot in recent days. Yet the real reasons the market reacted so sharply to Jonas' downgrade today aren't just the big price cut on QuantumScape shares but also the factors that drove his decision.

A worried person staring shockingly at his computer screen.

Image source: Getty Images.

Morgan Stanley's in-depth study of the EV battery market has apparently brought to light competition and technological risks along with potential fragmentation of the market, compelling Jonas to lower his expectations from QuantumScape despite still considering the company a "technological leader in solid state."

QuantumScape is working on power-dense solid-state batteries built using ceramic separators instead of an liquid electrolyte solution that can charge faster and are longer lasting and safer than the traditional lithium-ion batteries in use now.

Now what

Ironically, today morning, QuantumScape announced it had hit its 2021 goal of releasing testing data for its 10-layer battery cell, confirming that it could run at least 800 cycles at "better than one-hour charge rates." The company said it is now focused on its goals for 2022 and 2023, which include increasing the layer counts, quality, and consistency of cells, delivering prototypes to customers, and building its production line.

For those in the know, QuantumScape has a long-standing partnership with Volkswagen (OTC:VWAGY) and recently signed up a second auto manufacturer (it didn't reveal the name) to evaluate its advanced prototypes. 

Granted, QuantumScape unique ceramic-separator technology has yet to prove itself commercially viable, but it's not all smoke and mirrors. QuantumScape has been working on its technology for several years now, it has more than 200 patents and patent applications in process, and two automakers have already agreed to test advanced prototypes, with Volkswagen even confirming QuantumScape cells met technical milestones. Even if competition rises as the EV industry booms, there should be room for many battery makers, especially the ones dabbling in solid-state batteries like QuantumScape.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.