What happened
Shares of QuantumScape (QS 1.41%) fell 23.8% in September, according to data from S&P Global Market Intelligence. The solid-state battery start-up didn't have any business-related news in the month, but with rising interest rates across the globe, investors are getting less optimistic about unprofitable and early-stage stocks. As of Oct. 4, the stock is down over 50% year to date (YTD).
So what
QuantumScape is an electric battery start-up that went public through a special purpose acquisition company (SPAC) back in 2020. The company is trying to create a solid-state battery for electric vehicles (EVs), which would help improve range and efficiency over existing battery types. The EV market is set to become worth hundreds of billions of dollars this decade, a lot of which will be spent on batteries, so investors were extremely optimistic about QuantumScape when it went public. At one point, shares were up over 1,000% in less than a year.
The problem is, QuantumScape has no commercially viable product and has told investors it won't have one for many years. With zero revenue and tons of operating expenses (almost $100 million just last quarter), the company will likely need to raise new funds from the capital markets multiple times over the next few years.
Investors didn't think much of this when stocks were soaring and interest rates were at all-time lows. But now, with the Federal Reserve rapidly hiking interest rates to stamp out inflation, borrowing costs are increasing for businesses.
For investors, this has likely brought on pessimism about QuantumScape's ability to raise money at an interest rate that will not hurt its ability to invest in research and development. With many years out until the company is profitable, there is a lot of financing risk that investors are likely not happy about. This could have caused them to sell their shares.
Now what
QuantumScape has zero revenue, so it is quite difficult to do any valuation work on the stock. However, with its market cap now at just $4 billion versus over $50 billion at the peak of the EV bubble, it is now more reasonable to think the stock is a buy if the company can get a commercial product to market and start winning deals in the gigantic EV industry.
To be clear, there is a ton of risk in investing in a pre-revenue business. But if you are optimistic about QuantumScape's prospects over the long term, now could be a good time to start a position in the stock.
