Despite the Pullback, Tread Carefully With Kensington Capital

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As EV mania cools, is now the time to dive into Kensington Capital (NYSE:KCAC)? Reaching prices as high as $25.75 per share last month, Kensington Capital stock has sold off, and now changes hands around $14 per share. But this SPAC (blank-check company), which is acquiring privately-held QuantumScape, remains a solid play on the future of EVs.

Kensington Capital stock

How so? QuantumScape isn’t an EV automaker. Instead, the company is going after what could be a lucrative segment of the EV economy: batteries. But, instead of offering lithium-ion batteries (the industry norm), this company is looking to gain an edge with its line of SSBs, or solid-state batteries.

As I previously discussed, SSBs could be what makes EVs economically viable. That is to say, accelerate the shift from gasoline-powered vehicles to EVs.

Sure, QuantumScape faces a long road ahead. Its flagship product won’t be available until 2025. Yet, with major auto names like Volkswagen (OTCMKTS:VWAGY) backing the company, it’s clear this development-stage company has big potential.

So, what’s the play here? There’s a case to be made that shares will bounce back once its acquisition wraps up. But, tread carefully, given the risk today’s EV Bubble gets ready to burst.

Why Buy Kensington Capital Stock Today?

There’s no denying the long-term runway with QuantumScape. But, given that said success is years off, why buy now? I agree, there’s room for concern. Between risks the EV bubble pops (more below), as well as the underlying uncertainty as this company turns its technology into a marketable product, there’s a lot of risk buying in at today’s prices.

Yet, while it’ll be years before Kensington Capital stock really “pays off,” there’s potential for a near-term pop to prior price levels. How so? As InvestorPlace’s Mark Hake calculated last month, the projected value of Quantumscape in 2028 could mean shares today have a present value around $22 per share.

Sure, valuing a growth stock this way is more an art than a science. But, this could signal that risk/return remains in your favor at today’s prices. If others catch onto this, shares may bounce back toward the highs set in September.

On the other hand, there’s also good reason why shares could continue heading lower. The EV bubble has yet to pop. But, it’s hard to deny the enthusiasm for the EV is starting to fade.

And, if said mania continues to cool, it may be hard for Kensington Capital stock to stay at today’s prices, much less rally higher.

A Bursting EV Bubble and Other Risks

A major risk for Kensington (soon to be QuantumScape) shares is a crash in EV stocks. The bubble that helped pushed to sector to all-time highs has yet to burst. But, shares in major EV names, like Tesla (NASDAQ:TSLA), Nio (NYSE:NIO), and Workhorse (NASDAQ:WKHS) have topped out, or headed lower, in recent weeks.

While enthusiasm remains fairly high, further downside could be on the horizon. We know that’s a big risk for these aforementioned names, which have each multiplied in value so far this year. But, how will newly-minted EV stocks like Kensington fare if the bubble bursts?

An investor exodus from EV stocks could mean big downside from today’s prices. A sector sell-off could even push shares well below their IPO price ($10 per share). Keep this in mind if you are interested in taking advantage of the recent pullback.

But, a burst of the EV bubble isn’t the only factor that could send shares lower in the short term. The specter of a new publicly-traded EV battery company could dilute interest in this particular name. As Barron’s reported Oct 6,  SPAC RMG Acquisition (NYSE:RMG) is acquiring privately held EV battery maker Romeo.

Yes, comparing QuantumScape to Romeo isn’t really apples-to-apples. But, with more ways to invest in this emerging industry, investors may spread their bets widely. Some who hold Kensington shares now may sell them, and plow some of it into a Romeo position.

In short, there are plenty of reasons why shares could see selling pressure in the near term. But, if shares do fall to single digits, consider such price levels screaming buy territory.

Long-Term Play, Seize Opportunity and Buy the Pullback

With the big potential of its acquisition target (QuantumScape), Kensington shares remain a strong opportunity. But not without a high level of risk. The company could experience hiccups as it brings its SSBs to market. The EV bubble could finally pop, possibly pushing shares down to single digits. And now, with another EV battery name going public, interest in this play could fade, even if EV stock enthusiasm overall continues.

So, what’s the play here? Long-term opportunity with Kensington Capital stock remains. But tread carefully, as shares could head lower in the near-term.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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