Shares of lithium battery technologist QuantumScape (QS -1.97%) have unsurprisingly continued to slide lower throughout 2022. With just a few weeks of December left to go, the stock is down 70% on the year, and 94% off the all-time high it touched in late 2020.
QuantumScape isn't alone. All sorts of unprofitable tech stocks have been hammered this year as the Federal Reserve unwinds a decade-plus of loose money policy in its urgent effort to fight inflation. The Fed has hiked its benchmark federal funds interest rate at the fastest pace ever, and a side effect of that has been that investors have deflated their valuations for previously richly priced companies such as QuantumScape. But could the electric vehicle (EV) battery company begin to recover some of that lost ground in 2023?
A long road to being a business -- let alone an investable stock
QuantumScape went public via a reverse merger with a SPAC at the tail end of 2020. That was still relatively early in the pandemic, and though the world was in a bad place, the Fed had lowered the federal funds rate to 0%, and the government was liberally distributing stimulus cash to help businesses, households, and the U.S. economy stay afloat. With so many people largely stuck at home, a lot of new retail investors were born -- people ready to invest in the latest-and-greatest tech stocks with promising futures. QuantumScape was one of them, and its freshly minted public stock took off.
There has been no shortage of hype surrounding the solid-state lithium batteries QuantumScape is developing. Solid-state lithium-metal batteries are more energy-dense than the current standard lithium-ion variety, meaning that EVs powered by them could go much further on a single charge and recharge much more quickly. However, in normal times, this company likely would have never chosen to go public so soon.
That's because QuantumScape isn't just a normal start-up. It's a pre-production research company. It doesn't expect to begin realizing any revenue until 2024, and meaningful amounts of revenue likely won't start rolling in until 2025. Investor money was easy to come by in 2020, so QuantumScape cashed in, but many retail investors simply didn't understand what holding shares of a loss-generating company for many years would actually look like.
Nevertheless, QuantumScape raked in a tidy sum from its SPAC merger, giving it plenty of breathing room in its race against the clock. It had $1.16 billion in cash and equivalents on balance at the end of September 2022 (nearly 40% of the company's current $3 billion market cap). Through the first nine months of 2022, QuantumScape's free cash flow was negative $276 million, but it expects to enter 2023 with still north of $1 billion in cash on hand.
For now, the company has plenty of liquidity to continue researching, testing, and planning production for its solid-state lithium-metal batteries. But without any revenue, that balance will continue dwindling away -- which will put additional downward pressure on the stock price. The prospect that the Fed will keep hiking interest rates also doesn't bode well for QuantumScape, since higher interest rates reduce the present values of stocks, especially the stocks of companies that aren't generating profits yet.
Will QuantumScape recover in 2023?
Don't count on QuantumScape stock rebounding back to its late 2020 and early 2021 levels anytime soon. The company continues to make progress toward beginning battery production in 2024, but that doesn't mean it will turn profitable right away. Manufacturing is all about scale, so QuantumScape could continue bleeding cash well into 2025 -- or beyond -- depending on how quickly it can ramp up deliveries of its batteries to automakers.
But could its share price begin to recover next year? Possibly. A couple of things could help. First is the company's own internal development of its batteries. Any number of things could go wrong at this still-early stage of developing next-gen EV battery tech, from slow scientific progress on the tech itself to problems with basic materials to manufacturing facility hangups. But QuantumScape continues to contend it's still on schedule for early production in 2024, and it has demonstrated its ability to hit a curveball. For example, in Q2 of this year, the company found some of the base material it had acquired for use in its batteries was contaminated. By Q3, QuantumScape said it was making progress working with its supplier to reduce this problem, and was able to continue testing its batteries with potential customers.
As we enter 2023, if management can provide further evidence it could start generating revenue in 2024, the stock could pop higher.
A second external factor could also give QuantumScape's stock price a lift: an end to the Fed's interest rate hikes. It's too soon to tell, but the Fed has begun indicating it will ease back on the pace of its interest rate increases as soon as its December meeting. The market is optimistic that we'll reach this phase's interest rate peak sometime in early to mid-2023. If rates level off next year -- or even begin to decline -- that would reduce the intensity of a major headwind for QuantumScape. Higher rates cut into the present value of stocks, but lower rates can help boost valuations.
Of course, falling interest rates are not a reason to invest in QuantumScape or any other business. At the end of the day, the company's shares should begin to meaningfully recover only when it starts selling its batteries. Around the time when revenue starts filling in the top of the income statement, the market will begin looking for a timeline for QuantumScape to turn profitable -- and that will mark the real start to this stock's recovery.
