QuantumScape Corporation is a publicly-traded battery company which has generated headlines for innovation in the materials used in batteries – focusing on lithium-metal instead of lithium-ion.
That the firm is publicly-traded is unique. Typically, it is challenging for a firm with no revenues and none forecasted until 2024 – four years from today – to raise funds in the public markets. A screencap from the firm’s investor presentation is below:
Yet, the release of data supporting the improvements in charging time and capacity for batteries using lithium metal has only further stoked investor demand. The news has caused a 30% single-day spike in share prices as of 12/09/2020 making this a profitable investment to early believers and even accidental optimists.
The firm’s share price has skyrocketed since announcing a merger with Kensington Capital Acquisition Corp, a Special Purpose Acquisition Corporation, earlier this year. Holders of the SPAC prior to announcing the business combination will have seen a 659% return from the $10 SPAC price.
Eye-popping returns in the absence of revenue typically draw warnings about bubbles and, where technology is involved, the Dot Com bubble. Hallmarks of the Dot Com bubble were companies with grand prospects but no meaningful revenue going public to immense retail consumer demand and driving returns in the hundreds or thousands of percent from IPO price.
Naturally, market observers will ask, “is this good or bad for retail investors, especially those most at risk of being burned by chasing unrealistic returns?” This question is quite relevant to firms like QuantumScape. The firm did not go through an IPO; it merged with a “blank-check” company that exists with no operations but a publicly traded ticker and seeks to merge with a privately-held company. Reid Hoffman and Mark Pincus, billionaire founders of LinkedIn and Zynga, respectively, conceive of SPACs as a capital vehicle providing, “venture capital at scale”.
That scale is financed in no small part by retail demand for issues of the most innovative electric vehicle stocks, with Tesla leading the pack. While Tesla’s returns may very well be justified by its ability to deliver on grand production expectations, the magnificent returns have attracted less scrupulous actors with Nikola Motors’ Trevor Milton coming under SEC investigation for overstating company results. The surge in electric vehicle and battery stocks has not gone unnoticed either.
With Quantscape still years away from any semblance of revenue, is there cause for concern that retail investors may yet again be exposed to Dot Com bubble risks? While overvaluation comparisons to the Dot Com Bubble are typically strained, there are actually some very ironic/coincidental connections with QuantumScape. The firm’s founder and CEO, Chief Sales Officer, Vice President of Sales, and Head of Corp Development all worked at Infinera – where the current CEO and Founder was also CEO/Founder. For a visual representation of why people malign the Dot Com Bubble, observe the chart of Infinera’s stock price since IPO:
Needless to say, if you happened to grab shares at $6,000 in 2000, the outcome was not positive. Indeed, there was no turnaround or any corporate event that ever came about to ostensibly justify its peak share price and basically every price from IPO until it crashed was unjustified. Proof is of course in the pudding with shares remaining range constrained for the last several years.
But perhaps retail investors should be trusted with these risks. Efforts to modernize the qualifications for Accredited Investors, those who are permitted to invest into private funds focused on Venture Capital, have brought the wealth and income thresholds down to open investment opportunities to retail investors more widely. Time will tell if this is a repeat show with some of the literal same actors or the dawn of an EV revolution whose revenue-earning potential is only obvious to those investors bidding up Quantumscape stock today.
San Francisco Securities Outlook 