Ticker Reports for November 23rd
QuantumScape: High-Risk, High-Reward Solid-State Battery Play?
QuantumScape (NYSE: QS) is a developer of solid-state battery technology, and the company has experienced a significant share price decline of 27.05% year-to-date. This downturn raises questions about the company’s future, creating a compelling opportunity for investors to assess whether QuantumScape is a hidden gem or a risky gamble.
The Promise of Solid-State: A Quantum Leap for EVs?
QuantumScape’s technology is a leap in battery technology, and the company aims to revolutionize the electric vehicle industry with its solid-state batteries. Unlike conventional lithium-ion batteries that rely on liquid electrolytes, QuantumScape's batteries use a solid ceramic separator. This fundamental difference unlocks several game-changing advantages.
Solid-state batteries offer the potential for ultra-fast charging, reaching 80% capacity in just 15 minutes compared to the much longer times required for traditional batteries. This technology promises to alleviate range anxiety with a projected driving range of 400 to 500 miles on a single charge, surpassing the capabilities of most current EVs.
Furthermore, the solid electrolyte is non-combustible, significantly enhancing safety by mitigating the risk of fires that can plague traditional lithium-ion batteries. Lastly, solid-state batteries boast a longer lifespan, potentially retaining 95% of their initial capacity even after 1,000 charge cycles or roughly 500,000 kilometers. This translates to potentially fewer battery replacements than the current average of seven to eight years.
Partnerships and Production: Validating the Vision
QuantumScape's strategic partnership with PowerCo, Volkswagen's (OTCMKTS: VWAGY) battery subsidiary, validates the company’s technological vision. This agreement grants PowerCo a non-exclusive license to manufacture QuantumScape’s solid-state batteries, with a potential annual production capacity of up to one million battery units. This partnership offers a pathway for QuantumScape to scale its technology without the massive capital outlay required to build its gigafactories. While production at this scale is contingent on successful technology transfer and achieving stringent performance metrics, the agreement provides QuantumScape with a $130 million royalty prepayment, bolstering its financial health and demonstrating PowerCo’s commitment.
Adding to the momentum, QuantumScape recently achieved a significant milestone by shipping its QSE-5 B-sample cells to automotive partners for testing. These B-samples are prototype battery cells designed to allow potential customers to evaluate the technology’s performance in real-world automotive applications. This achievement marks a crucial step towards commercialization, paving the way for C-samples, which are the final pre-production prototypes tested before mass production.
Navigating the Uncertainties: A Prudent Path Forward
Despite the promising outlook, several critical challenges and uncertainties must be addressed. Scaling production from laboratory prototypes to mass-market volumes is a huge task. QuantumScape must demonstrate the ability to manufacture high-quality batteries consistently and cost-effectively at scale, which involves overcoming significant technical and logistical hurdles related to yield optimization, equipment productivity, and process control.
The battery market is highly competitive, with established players and emerging technologies vying for dominance. QuantumScape faces competition not only from traditional lithium-ion battery manufacturers but also from companies exploring alternative battery chemistries, such as lithium-sulfur and solid-state batteries with different material compositions. QuantumScape must demonstrate a clear competitive advantage in terms of performance, cost, and scalability to secure its position in the market.
QuantumScape's financial position requires scrutiny. As of its most recent report, the company held $841 million in liquidity, including $174.7 million in cash and equivalents and $666.3 million in marketable securities. However, as a pre-revenue company, QuantumScape is burning through cash. QuantumScape’s earnings report for the third quarter of fiscal year 2024 (Q3 FY2024) revealed a net loss of $119.7 million and an adjusted EBITDA loss of $71.6 million. While the PowerCo partnership provides some financial relief, careful monitoring of the company's burn rate and future funding needs is warranted. The company's debt-to-equity ratio (D/E) is currently a healthy 0.03, indicating a low level of debt relative to equity.
Portfolio Positioning and Risk Management
QuantumScape represents a unique opportunity for investors seeking to diversify their EV-focused portfolios. Unlike traditional automakers, QuantumScape offers exposure to a specific segment of battery technology, a critical component of the EV revolution.
However, it’s crucial to acknowledge the inherent risks associated with this investment. As with any pre-revenue company pursuing disruptive technology, QuantumScape carries a high degree of uncertainty. The stock’s high beta of 4.60 further underscores its volatility. Therefore, investing in QuantumScape should be considered high-risk, high-reward. Investors must carefully assess their risk tolerance and time horizon before considering an investment in this volatile stock. With a current price of around $5.00 and an average price target of $6.26, there is potential for over 23% upside. Still, it’s essential to remember that analyst price targets are not guarantees of future performance.
Innovation, Execution, and Uncertainty
QuantumScape's success hinges on its ability to translate its promising technology into a commercially viable product. The road ahead will require flawless strategic execution in scaling production, navigating competition, and securing further partnerships. Investors should closely monitor critical milestones, including the progress of B- and C-sample testing, advancements in the Cobra separator process, further developments with PowerCo and other potential partners, and the company's financial performance. By carefully tracking these developments and maintaining a balanced perspective on the possible rewards and inherent risks, investors can make informed decisions about whether QuantumScape deserves a place in their portfolios.
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Santa Claus Rally: 4 Reasons Stocks Could End the Year Strong
The 2024 trends and outlook for 2025 are reasons for the market to show some holiday cheer and rally through the year’s end. Not only is the S&P 500 (NYSEARCA: SPY) in an earnings-driven uptrend but the stage is set for tailwinds to develop next year and sustain the trend into 2026.
Falling interest rates and deregulation go hand in hand with rising stock prices because of increased business investment, accelerated economic activity, and earnings growth of the nation's largest companies. Earnings growth is important because it fuels a robust outlook for capital return growth, which includes dividends and share buybacks.
The S&P 500 has been climbing a wall of worry for the last two years, with high inflation on one side and the risk of a recession on the other. Meanwhile, despite the risks, the S&P 500 returned to earnings growth and has sustained sequential quarterly acceleration with an outlook for the trend to continue.
1) Bull Market Supported by Cash Flows and Climbing a Wall of Worry
The consensus forecasts for Q4 2024 and the full-year 2024 S&P 500 earnings growth have come down from their peaks but remain consistent with an accelerating growth outlook, expecting more than 12% in Q4 and a higher pace in the first half of 2025. Capital returns are growing by a high-single-digit amount, with S&P 500 dividend payments up 2.2% and repurchases nearly 35% in FQ2. Total capital returns are expected to remain strong in FQ3 and Q4 2024 and to accelerate in 2025, growing by another mid-teens figure, providing a strong tailwind for stock prices.
2) S&P 500 Headwinds Ease, Tailwinds to Form in 2025
Easing monetary policy headwinds and deregulation are expected to create tailwinds within the economy. The full impact of Trump’s policies is unknown, with lower taxes and deregulation offset by tariffs, but one thing is clear. The result of his policies during the first term created volatility, but the trade war lasted only so long, and businesses adapted and thrived. The economic situation in late 2019 and the first two months of 2020 were solid, driving a similar outlook for earnings as in 2024 and 2025, with accelerating growth expected to continue sequentially until COVID entered the picture.
3) Healthy Labor Data Underpins Economic Activity
Healthy labor markets are a driving force in the economy. The labor data has cooled from the peaks during the COVID pandemic but remains strong relative to historical levels. Job creation, openings, turnover, and layoffs are all consistent with the 2019 or early 2020 economy, which was considered strong at the time. Initial claims are the leading indicator for labor market health, and they are trending within very healthy levels along with the total claims data. The initial claims are running in the low 220,000 range, aligning with past periods of economic strength and bull markets supported by consumer spending.
4) Resilient Consumers Spend Big on Small Items
The health of the labor market is seen in the consumer data, another driving force for stocks. Retail sales are growing at a solid, if low, single-digit figure and outpacing inflation slightly. The October data shows retail sales up by 2.8%, edging out core inflation by 20 basis points as consumers focus on smaller items versus big-ticket items.
The resilient consumer is seen in the results from retailers like Walmart (NYSE: WMT), Williams-Sonoma (NYSE: WSM), and TJX Companies (NYSE: TJX), which report strength in all categories and reveal strength in all consumer price points. These companies also provided improved guidance, citing revenue and margin trends that may be cautious. There is a high likelihood of outperformance during the holiday reporting season. The takeaway is that the forecasts for holiday season shopping are likely low and will rise or be beaten, providing an additional lift for stocks.
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Top 3 Financial Stocks Set to Gain From Looser Regulations
After several years of lackluster performance, financial stocks are one of the best-performing sectors in 2024. A key reason for this is the Federal Reserve’s pivot to lower interest rates. In addition to reducing the cost of borrowing, lower rates have increased the value of some banks' investment portfolios.
And they could be headed to an even better year in 2025. The banking sector, like the nation’s monetary policy, tends to be likened to turning a battleship. However, Donald Trump campaigned on a platform of sweeping changes that, if enacted, would be bullish for finance stocks.
One of Trump’s central campaign promises was to loosen regulations on American companies. That will likely include loosening the stringent regulations that banks have been dealing with since the financial crisis of 2008 and 2009. One example is likely to be a pause on instituting the new banking requirements, known as the Basel III Endgame, which were expected to take effect sometime in 2025.
Of course, every new administration brings with it a list of unknowns, and the Trump administration is no different. Banks will be watching carefully to get clarity on issues like tariffs and what that would mean for the balance of trade. It’s also possible that the Federal Reserve may slow down its pace of rate cuts.
But those are issues for another day. For now, investors are looking at what financial stocks they should be eyeing for solid returns in 2025. Here are three companies that look like certain winners.
JPMorgan Chase Is About Buying the Best
JPMorgan Chase & Co. (NYSE: JPM) seems like an obvious winner among finance stocks in the Trump administration. The day after the U.S. presidential election, shares of JPM stock shot 11% higher, nearly double that of the Financial Select Sector SPDR ETF (NYSE: XLF). But this isn’t just a recent phenomenon. The banking giant has been one of the best stocks to own over the last five years. The total return on JPM stock is 116.76% at that time.
JPM stock was up nearly 35% in 2024 before the election. The stock hit a new all-time high in January and hasn’t looked back. Since the company’s earnings report in August, analysts have been raising their price targets, which means there may still be some solid upside for investors on the sidelines.
Not only is it one of the most reliable bank stocks, but it’s also a blue-chip dividend stock. In the case of JPMorgan, the dividend has a 2.05% yield and has increased for 14 consecutive years.
Wells Fargo May be Able to Shed Its Asset Cap
Prior to the presidential election, shares of Wells Fargo & Co. (NYSE: WFC) were essentially flat for five years. It's fair to say that the bank brought some of the trouble on itself due to the fake account scandal that engulfed it in controversy in 2016.
Among the many penalties the bank has faced because of the scandal, the most severe in terms of earnings was the asset cap imposed on the bank in 2018 by the Federal Reserve. At that time, Wells Fargo was barred from having more than $1.95 trillion in assets (i.e., an asset cap).
That has cost Wells Fargo revenue from loan origination and subsequent interest payments on those loans. The asset cap has, since it was imposed, cost the bank more than $10 million in earnings.
The bank has submitted the necessary documents to lift the cap, and the matter now rests with the Fed. While progress slowed during the Biden administration, the Trump administration is expected to expedite the approval process. If the bank has thoroughly met all requirements, a favorable resolution is likely.
Goldman Sachs Is Ready to Deal
The Biden administration has slowed the pace of mergers and acquisitions (M&A) and initial public offering (IPO) activity, which are key revenue drivers for Goldman Sachs Group Inc. (NYSE: GS). After a record year for M&A activity in 2021, deal volume fell 42% in 2023, and while there have been a few notable deals in 2024, the sector could use a release from its shackles.
That’s something a pro-business administration will provide. And, of course, lower taxes and less regulation will also be bullish for GS stock. The company’s stock shot up 12% after the election. However, analysts have been increasing their price targets for the company’s stock since it delivered strong earnings in October.
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