Shares of solid-state electric battery-maker QuantumScape (QS -2.88%) were in freefall today, down 14% as of 3:21 p.m EST.
The company reported third-quarter earnings at the end of October, but today's move was likely caused by a big analyst downgrade, sending the stock even lower than many other EV stocks, which also generally had a bad day today.
This morning, Morgan Stanley analyst Adam Jonas issued a note on QuantumScape, downgrading his rating to the equivalent of a "sell," while lowering his price target on the stock from $12 to just $4.
That's a pretty hefty 67% cut in the price target, but such big moves are happening these days for unprofitable companies amid rising inflation and interest rates. Of note, the Consumer Price Index (CPI) for October, to be released tomorrow, is likely causing some consternation among investors ahead of the number. A higher-than-expected inflation number could mean higher rates will last longer, which is especially bad for unprofitable growth stocks.
QuantumScape is more than just unprofitable, however; it's actually pre-revenue, as the company is still working to commercialize its solid-state battery technology. Solid-state technology is supposed to be superior to today's lithium-ion EV batteries, but they haven't been commercialized yet.
In the note, Jonas said,
We believe 3Q results were narrative changing... While solid-state batteries may still represent the future of energy storage, the path to getting there is proving to be more difficult and longer-dated than we and the market had expected.
And therein lies the problem for really any unprofitable stock or any stocks with lots of debt. Rising interest rates are essentially shutting off the capital markets for many companies, so any company that's burning cash and may have to raise money in the near or medium term could get in trouble if such funding is inaccessible or outrageously expensive.
On the bright side, QuantumScape does have about $1.15 billion in cash on its balance sheet and no debt; however, the company plans to burn through between $400 million and $500 million in cash this year, between operational expenses and capital expenses. Should that level of cash burn persist, QuantumScape will be on a tighter clock to get to commercialization in the next two years, putting management -- and the company's investors -- under further pressure.