Stocks to sell

QS Stock Won’t Stay Charged in a ‘Higher for Longer’ World

I have been skeptical about QuantumScape (NYSE:QS) stock for a while.

Still, I see why some investors buy QS stock despite a vague commercialization timeline, high cash burn, and the risk of further shareholder dilution.

All it will take for shares to spike once is a bit of progress with the company’s efforts to bring solid state batteries to market.

But before diving into QS, on the view the potential reward far exceeds the risk, keep in mind that there’s something that could weigh on shares in the months ahead.

The prospect of interest rates staying “higher for longer,” i.e. not coming down rapidly in 2024, as previously expected, i a headwind worth considering.

The development may call into question this stock’s appeal as an “asymmetric wager.”

What Interest Rate Policy Means for QS Stock

At first, you may think there is little connection between central bank policy on interest rates, and the future prospects of QuantumScape. This is true. Whether this startup succeeds or flounders hinges completely on its ability to bring SSBs to market.

Yet while “higher for longer” interest rates may not affect its chances of reaching a technological breakthrough with EV batteries, this factor may affect the ability for investors deciding to buy QS stock today to profit on their bullish wager.

Growth stocks, in particular speculative growth stocks, are highly sensitive to changes in interest rates.

While not the main factor, the Fed’s raising of interest rates starting in 2022 definitely played a role in QuantumScape’s steep drop in price during that year.

In 2023, despite experiencing a few “surge and sink” waves, shares are up by more than 18% year-to-date. Like with other tech stocks, the prospect of a rapid “pivot” on interest rates in 2024 has likely played a role in this.

But with the Fed’s latest statements, it’s looking more likely that high rates will persist for much of next year. Sentiment is shifting, and not in a good way.

This Counterargument Doesn’t Apply Here

Tech/growth names have sold off since the Fed’s “higher for longer” statements last week. To many, this pullback may appear to be the start of an extended reversal.

Others, however, could be buying into a bullish counterargument recently made by analysts at Wedbush.

The Wedbush analysts believe that big tech stocks with high exposure to the AI mega-trend can power through the “higher for longer” environment.

This is a valid argument for deciding whether to hold on to Magnificent Seven stocks in your portfolio. Unfortunately, this argument really doesn’t apply to QuantumScape, given the lack of an AI connection. I wouldn’t bet on a “powering through” taking place.

Instead, I would assume the impact of elevated interest rates will keep weighing on QS. I would also assume the other issues that I discussed above to keep on affecting the stock’s performance.

As noted before, rising competitive risks, from established and startup battery firms alike making progress in SSBs, is something else that may place more pressure on shares.

Yet Another Reason to Stay Cautious

In late 2020, an interesting growth story, high confidence in the company’s ability to execute, and a near-zero interest rate environment all contributed to propelling QS beyond $100 per share.

Since then, the “growth story” with QuantumScape has become dubious. The company has made underwhelming progress in its efforts to develop SSBs for EVs on a mass scale.

This casts serious doubt on this aspiring EV battery maker hitting the financial projections discussed in its initial investor presentation.

Interest rates have also climbed considerably during this time frame. With investors confident in a fast pivot, this factor had a more muted role in the stock’s sharp decline.

Now, however, with rates not returning to anywhere close to near-zero levels in the foreseeable future, there’s yet another reason to be cautious when it comes to 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.