In my last article on QuantumScape (NYSE:QS), I discussed the recent rally with QS stock, and whether this rally was due to the possible unveiling of game-changing news in the EV technology company’s then-upcoming earnings release.
Flash forward to now. QuantumScape’s latest results/updates have just hit the street. As of this writing, the earnings release has only resulted in a modest boost in QS’s stock price.
With this, one can argue that my InvestorPlace colleague David Moadel made the right call in his pre-earnings predictions for QuantumScape.
That is, rather than provide investors with a jolt, this earnings release has instead been a dud on arrival.
Taking a closer look, you can figure out very quickly why this event has resulted in only a limited amount of excitement among investors. That’s bad news for shares, as I will explain in more detail below.
QS Stock: The Latest Earnings/Updates
Post-market on July 26, QuantumScape released its results for the fiscal quarter ending March 31, 2023. As expected, there was zero revenue during the period for this pre-revenue company, but net losses came in slightly higher (26 cents per share) than analyst estimates (22 cents per share).
Of greater concern, however, were the takeaways (or lack thereof) from the business updates provided in QuantumScape’s quarterly letter to shareholders, released alongside its quarterly results.
Per the letter, the company made some progress with its efforts to bring a solid-state EV battery to market. This progress included the shipment of sample high cathode-loading unit cells to QS’s automotive manufacturing partners.
Still, while touting some research and development progress, this update differed little from prior quarterly updates for QS stock. As before, the company was vague about when it expects to reach the commercialization stage.
QuantumScape also reiterated its prior cash burn runway, anticipating it has enough liquidity on hand ($900 million) through the second half of 2025 to remain in the pre-revenue stage without needing another capital raise.
In short, while the updates indicate that QuantumScape’s prospects have not worsened, they don’t exactly clear up any uncertainty with this company, either.
Why a Lack of News is Bad News
The latest earnings release/updates appear to have been a wash, but don’t assume this means QuantumScape shares will at worst tread water from here in the near-term.
QS stock may have experienced a modest rally after earnings, yet a lack of news could still turn out to be bad news for shares, after this initial move higher.
Why? As I also discussed in my last QS article, excitement about its short squeeze potential may have been what was driving the rally.
It’s possible that speculators dived into the stock, on the hopes that positive surprises would leave the short side scrambling to close out positions.
With the lack of major updates, a short squeeze with this stock now seems less likely than before. Right now, it may not be the short side that is scrambling for the exits. Instead, those on the long side may be the ones scrambling.
This, in turn, may mean a sell-off in the weeks/months ahead.
Only time will tell how much shares sink if the short-squeeze speculators make their exit. However, remember there is another major risk that could really sink the stock over a longer time frame.
Your Best Move With QS After Earnings
Talk of a long cash runway notwithstanding, it is not as if the dilution risk with QuantumScape has completely gone away.
Down the road, assuming it makes it to the commercialization stage, the company will likely need to raise more cash, in order to finance the build-out of its manufacturing infrastructure.
Chances are QS will need to raise hundreds of millions, if not billions, in order to ramp up production.
Given that the company has an existing shelf offering outstanding, QuantumScape will probably raise more money through the dilutive sale of additional shares.
This dilution could in turn serve as a drag on long-term returns for the stock.
Bottom line: QuantumScape remains a situation of high downside risk, coupled with questionable upside potential. As the risk/return proposition remains unfavorable, if you own QS stock, sell into strength. Otherwise, your best move is to stay away.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.