Automotive startup QuantumScape Corporation (QS - Get Rating) sought to revolutionize the electric vehicle industry by bringing solid-state lithium-metal battery technology. However, the stock has declined 42.4% in price over the past nine months and 48.2% over the past year to close the last trading session at $6.32.

In this piece, I have discussed why it could be wise to avoid the stock now.

QS is developing a solid-state lithium-metal battery technology that is believed to be a game changer for the electric vehicle industry. These batteries are highly efficient, long-lasting, provide fast charging, and possess a longer range.

The company scaled its breakthrough battery technology from a single-layer to 24-layer cell prototype. Recently, the company admitted that the company still has “work to do to improve reliability.”

The breakthrough in technology has earned QS partnerships with six automobile companies, the biggest being Volkswagen AG (VWAGY - Get Rating), which has also invested in the company. The company is still in its pre-revenue stage as it has yet to commercialize its product. Moreover, it is yet to provide a timeline for the transition from prototype to commercialization.

Wall Street analysts expect the stock to hit $5.60 in the near term, indicating a potential downside of 11.4%.

Here are some factors that could influence QS’ performance in the upcoming months:

Disappointing Financials

For the fiscal first quarter that ended March 31, 2023, QS’ loss from operations widened 21.3% year-over-year to $109.98 million. The company’s net loss attributable to common stockholders widened 15.8% over the prior-year quarter to $104.65 million. In addition, its net loss per share widened 14.3% year-over-year to $0.24.

Poor Profitability

In terms of the trailing-12-month Return on Common Equity, QS’ negative 30.53% compares to the industry average of 10.21%. Its trailing-12-month Return on Total Capital of negative 18.33% compares to the industry average of 6.14%. Likewise, its negative 30.20% trailing-12-month Return on Total Assets compares to the 3.65% industry average.

Unfavorable Analyst Estimates

Analysts expect QS’ EPS for fiscal 2023 and 2024 to remain negative. Its revenue for the quarter ending June 30, 2023, is expected to remain negative.

POWR Ratings Show Weakness

QS has an overall F rating, equating to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. QS has a D grade for Quality, consistent with its poor profitability.

It has a D grade for Sentiment, in sync with its unfavorable analyst estimates.

Within the A-rated Auto Parts industry, QS is ranked #57 out of 58 stocks. Click here to access QS’ Growth, Value, Momentum, and Stability ratings.

Bottom Line

QS’ stock is trading below its 50-day and 200-day moving averages of $7.06 and $8.13, respectively, indicating a downtrend. As the world moves away from internal combustion engine (ICE) vehicles to electric vehicles (EVs), the need for long-lasting, efficient, fast-charging batteries is vital.

QS’ solid-state batteries aim to have the potential to solve this problem, but the company is yet to commercialize its products. It is not generating any revenues and looks far from achieving profitability.

Given its disappointing financials, unfavorable analyst estimates, and poor profitability, it could be wise to avoid the stock now.

Stocks to Consider Instead of QuantumScape Corporation (QS)

QS has an overall POWR Rating of F, equating to a Strong Sell rating. However, investors could check out these other stocks within the Auto Parts industry with an A (Strong Buy) or B (Buy) rating: Gates Industrial Corporation plc Ordinary Shares (GTES - Get Rating), JTEKT Corporation (JTEKY - Get Rating), and Allison Transmission Holdings, Inc. (ALSN - Get Rating).

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QS shares were trading at $6.32 per share on Monday afternoon, up $0.08 (+1.28%). Year-to-date, QS has gained 11.46%, versus a 10.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...

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