QuantumScape Stock Is a Much Better Buy After This Downgrade Pullback

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Morgan Stanley analyst Adam Jonas downgraded QuantumScape (NYSE:QS) stock on Nov. 16 from “Overweight” to “Equal-weight.”

Source: Michael Vi / Shutterstock.com

More concerning is the 43% cut in the QS stock target price from $70 to $40, especially since it’s trading at around $35 today.

If you’re a glass-half-full investor, you won’t be concerned with this drop, given QS is up more than 47% over the past month.

However, assuming QuantumScape’s share price doesn’t go anywhere for the final 45 days of 2021, and you bought at the end of 2020, you’re still down more than 57% on the year.

So if you believed in the company’s technology in 2020, nothing’s changed that should alter your opinion. 

The company’s Nov. 16 announcement that it successfully met its final 2021 goal ahead of schedule should have you dancing on the spot. 

The company’s testing of its 10-layer battery cells revealed that it could run 800 cycles at 25 degrees Celsius (77 Fahrenheit) in less than a one-hour charge. 

Autoevolution discussed the company’s solid-state batteries in early November:

“Mobile Power Solutions repeated the tests QuantumScape did last December. They revealed that the three single-layer cells evaluated lost ‘less than 10%’ capacity after 800 cycles. Each cycle corresponds to fully charging and discharging each cell in one hour. Summing up, the QuantumScape single-layer solid-state cells retained more than 90% capacity.” 

I recommend you read the entire article. It gets to the heart of the matter, which is determining if its solid-state batteries will have what it takes to go into production in 2024. 

It’s just one step, mind you but in the right direction.

QuantumScape Faces Mounting Competition

Since I don’t have a copy of the analysts’ comments regarding QuantumScape’s downgrade, I’ll have to pull together some of the information available online. 

The Fly had this to say about the analyst moving to the sidelines:

“While the analyst continues to view QuantumScape as a technological leader in solid state batteries, he has ‘modestly haircut’ his expectations for the company’s ramp-up to scale,” The Fly reported on Nov. 16. “Overall, the analyst noted that his firm now has a greater number of names under its coverage with exposure to the battery theme, some offering a better risk/reward than QuantumScape.”

Morgan Stanley estimates that the total addressable EV battery market will be $525 billion annually by 2040. That’s only 19 years from now.

However, if you read between the lines, the analyst sees battery technology changing so rapidly in the next few years that it simply doesn’t make sense to make such a large-scale bet on QS at this point in its development, especially given how far its stock has run in the past month.

In addition, if QuantumScape thought its solid-state batteries could be ready for production later next year or early in 2023, that would significantly reduce an investor’s company and technological risk, making the reward proposition that much more attractive. 

The Bottom Line

In my last article about QS, I suggested that there were few catalysts to push its share price to $40 by the end of the year. However, if you were a speculative investor, it was worth the gamble. 

At the time, it was trading at $31. It went over $40 ($43.08 to be exact) on Nov. 15, six trading days later. The Morgan Stanley downgrade erased most of these gains. 

However, the announcement it achieved its final 2021 goal is a catalyst that should keep QS trading in the $30s for the remainder of the year. I doubt it would fall into the $20s knowing that its battery cells are performing as expected. 

QS stock remains an excellent speculative investment. If you have a long-term holding period, I would buy on the dip.  

On the date of publication, Will Ashworth did not have (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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. 

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