QuantumScape’s (NYSE:QS) strategic partnership with Volkswagen (OTCMKTS:VWAGY) is perceived to be a massive positive in the corner of QS stock. Although the EV battery technology company remains in the pre-revenue stage, and keeps burning through hundreds of millions each year, those bullish on the stock believe it will all be worth it in the end.
Once QuantumScape can bring solid state batteries to market Volkswagen will be its largest customer. That should generate significant revenue, and helping the company to scale toward profitability. In turn, fueling a big rebound for shares.
However, there may be something that calls this optimistic argument into question. That would be the fact Volkswagen is falling behind in the EV market.While perhaps not the biggest red flag out there for this stock, it is something to keep in mind.
QS Stock and VW’s EV Headwinds
Among the incumbent auto manufacturers, Volkswagen was one of top EV contenders. Coupled with its leading market share in China, people believed it could take on Tesla (NASDAQ:TSLA) and Chinese EV makers in the world’s largest electric vehicle market.
Now, however, few analysts hold such a view. Instead, pessimism about Volkswagen’s EV growth prospects have spiked dramatically.
As analysts at UBS argued back in September, VW has lost its “first mover advantage” in the Chinese EV market to Tesla and local EV makers.
That’s not all. The company’s share of the overall auto market in China has declined. Vehicle volumes have dropped 15% since 2015. Profitability has declined even greater (around 42.3%) during this time frame.
If that’s not bad enough, the UBS analysts also pointed out that Chinese EVs could pose a competitive threat in Volkswagen’s home market of Europe.
These headwinds for Volkswagen aren’t having much of an impact on QuantumScape directly today. Still, this trend may bode badly for its future growth prospects, and its path to profitability.
Commercialization and Growth
Sure, it may seem too soon to worry about how VW’s EV headwinds in 2023 can affect QuantumScape’s potential sales later this decade. After all, this company has yet to prove it can mass produce SSBs for EVs.
QS stock sports a valuation in the billions today based building SSBs and sellig them by the billions to Volkswagen.
Volkswagen’s EV sales growth in the U.S. and Europe is helping to counter sluggish Chinese sales.
Remember that China-made EVs could grab much of the European market. In the U.S. competition may hinder market-share growth.
Even if QuantumScape reaches commercialization and Volkswagen becomes its largest customer growth for this company could still miss expectations.
Yet Another Reason to Stay Away
Admittedly, one could counter that Volkswagen’s falling behind in EVs is merely temporary.
Or, that QuantumScape’s batteries, which could be far superior than the EV batteries in use today, could (if used in its vehicles) could help VW make an EV comeback.
That said, I wouldn’t jump to that conclusion. QS is of course not the only company developing SSBs for EVs right now.
In fact, given the progress China is making in SSB development, VW’s Chinese competition could come equipped with similar (if not better) technology, sooner than when QuantumScape’s batteries are ready for prime time.
As for QS’s potential to sign on other automakers, VW’s U.S., European, and Japanese rivals are all at work on their own SSB development efforts, either in-house or with other EV battery startups.
Given this exposure to VW’s fading EV prospects, there’s now yet another reason to stay away from QS stock.
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.