On April 10, I said that QuantumScape (NYSE:QS) was a long-term home run under $42 a share. A month later, QS stock is down almost 32% as I write this and 64% year-to-date.
While I think the company’s vision for next-generation solid-state lithium-metal electric batteries is completely righteous, not everyone feels the same. Especially not Scorpion Capital, whose short report in mid-April was a big reason for its April monthly decline.
As much as I want to say, “It was a buy below $42, so at $33, it’s a screaming buy,” I understand that InvestorPlace readers look to its contributors for balanced advice.
Despite Volkswagen’s (OTCMKTS:VWAGY) $200 million financial and time commitment to QuantumScape’s battery development, it would be imprudent of me not to at least consider the options.
So, I’ll consider if there’s a better way to play QuantumScape without getting burned.
Volkswagen Instead of QS Stock
No one, it seems, stands to benefit from QuantumScape’s super fast-charging battery more than VW itself. After all, it plans to sell one million electric vehicles (EVs) in 2021 and be the global leader by 2025. A step further, it expects 70% of its European sales to be EVs by 2030.
By putting QuantumScape’s battery in its EVs, it’s betting that customers will want to own their vehicles in droves, given the battery could have a possible range of 600 miles and an 80% recharge in just 15 minutes. I doubt you could stop for a washroom break in that little time.
No doubt it’s a big hill to climb. But either way, Volkswagen is all-in on electric. It’s already selling the ID.4 in North America. As QuantumScape makes progress on its batteries, VW will have gained a few years of insight into what consumers want and don’t want in an EV.
So by the time a QuantumScape battery is ready for production, Volkswagen will be much more equipped to receive it and put it into its vehicles. It sounds to me like a win/win.
What If I’m Not Convinced About VW’s EVs?
Well, in that case, I would probably look to an exchange-traded fund (ETF) that held either VW or QS stock.
In the case of an ETF playing off VW, it would reduce your exposure to the German company. The First Trust NASDAQ Global Auto Index Fund (NASDAQ:CARZ) is really your only option. It has 33 holdings, including VW at a weighting of 4.73%, making it the seventh-largest holding.
The ETF owns VW’s preference shares. However, don’t fret. They’re identical to the ordinary, except they have no voting rights.
Up over 108% over the past year and 8.6% YTD, CARZ gives you a nice play on the burgeoning EV scene while keeping a foot in the internal combustion engine (ICE) arena.
Now, if you go the QS stock route, your best bet is the Global X CleanTech ETF (NASDAQ:CTEC), a collection of 40 stocks whose technology products and services will contribute to a reduction in the environmental impact industry has on the world.
CTEC tracks the performance of the Indxx Global CleanTech Index. In existence since October 2020, CTEC has grown to almost $150 million in assets in a little over six months. QuantumScape has a weighting of 3.27% and is the ETF’s 11th-largest holding.
If it were me and I had to pick CARZ or CTEC, I would go with the latter because it gives you a more direct stake in the battery business while also gaining exposure to many interesting companies.
I suppose if you were willing to put $5,000 into QS, a possible option would be to buy $2,500 in both CARZ and CTEC, but that’s entirely your choice. Either way, you do considerably reduce QuantumScape’s company-specific risk.
The Bottom Line
InvestorPlace’s Dana Blankenhorn wrote an amusing commentary about QuantumScape recently. Dana wasn’t trying to be funny describing the Catch-22 situation investors find themselves in.
“No one knows how close Quantumscape is to proving its claims. Even CEO Jagdeep Singh may not know,” Blankenhorn wrote on May 5.
“Quantumscape is like a biotech company with a promising therapy in a first stage trial. The thing may work. The thing may not.”
My colleague believes that QuantumScape came public way too quickly, which is ironic given Bill Gates (one of its backers) ranted about companies going public too soon on CNBC at the beginning of April.
That’s the beautiful thing about investing.
Here you have one of the world’s wealthiest people saying that many recent IPOs were way too early but not his own investment. He’s either right or wrong.
But if you think he’s right about QuantumScape but don’t want to make the speculative play, I’ve given you several ways to take the gracious way out.
You might want to take it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.