When I last wrote about QuantumScape (NYSE:QS) in late September, I argued that if you could afford to lose it all, QS stock at $23.50 was in the buy zone. As I write this, it’s up 33% in the past month, trading above $30 for the first time since late June. 

If you own the electric battery developer’s stock, that’s an excellent thing. 

Do I hear $40? It will be tough. Here’s why.

QS Stock to $40 By Christmas?

QuantumScape hasn’t consistently traded above $40 since the early part of 2021. However, if you’re counting, the company’s stock closed above $40 for 91 consecutive trading days from Dec. 4, 2020, to April 14, 2021. That’s more than four months.

 It’s got a history of trading over $40, so it’s more than possible that it could hit $40 by Christmas. However, for it to jump another $10 or 30% in the 40 trading days left in the year is a tall order to be sure. 

It needs more news like the two supply deals it announced in September with top-10 car and truck manufacturers. Maybe not quite as earth-shattering, but news nonetheless.

On Oct. 26, QuantumScape reported its Q3 2021 results. 

With zero revenues, it’s all about the operating expenses. In the first nine months of 2021, they were $148.1 million, 192% higher than a year earlier. However, thanks to the $168.7 million change in fair value of assumed common stock warrant liabilities, the company generated a GAAP profit of $21.3 million.

The Non-GAAP Reality

If you add back the $168.7 million change in fair value of the warrant liabilities, it had a non-GAAP operating loss of $112.1 million in the first nine months, up from $41.6 million a year earlier. 

Duff and Phelps wrote in June:

“[T]he reclassification of warrants from equity to a liability on the SPAC balance sheet is much ado about nothing. The change has no cash impact and the quarterly change in fair value results in non-cash expense or income,” stated Louisa Galbo and David Larsen.

“The fair value of the warrant liability will increase or decrease depending on several factors, most importantly the change in the underlying share price and the publicly traded warrant price.”

QS stock through Sep. 30 was down 51% year-to-date. Now that it’s rising in value, the expense will turn to income. None of it will affect its cash and marketable securities, which sat at more than $1.5 billion at the end of September. 

Most importantly, the company used $200 million in free cash flow (FCF) over the past 12 months through Sep. 30. That’s up from $90 million at the end of 2020. 

So, it’s burning $50 million per quarter in 2021, up from $22.5 million in 2020. That’s 122% growth. Assuming it uses $75 million in FCF in Q4 2021, it could burn as much as $225 million in FCF in 2021, up 150% from 2020. 

If it kept up the pace of negative free cash flow, it would burn through its cash hoard in a little more than 24 months. 

That’s the downside to this situation.

Third-Party Test Results and the Bottom Line

On Oct. 27, QuantumScape released third-party test results on the performance of its solid-state lithium-metal battery cells. They lived up to their billing from December 2020.

Essentially, the battery cells performed under extended, high-performance usage. Both Volkswagen (OTCMKTS:VWAGY) and the other top-10 car and truck manufacturer it is working with has got to be happy about the battery cells’ durability under such conditions.

Of course, this doesn’t mean you’re going to see QuantumScape batteries in electric vehicles anytime soon. Still, it does mean that the days of zero revenues might be coming to an end in 2022 or 2023, as manufacturers start putting in pre-orders for the solid-state lithium-metal batteries. 

While it can be pretty frustrating to read quarterly reports that possess very little substance in terms of sales and instead dwell on the future hurdles it must overcome to get concrete battery production.

In many ways, buying QuantumScape stock is a giant leap of faith rather than a smart and considered investment. 

However, like many world-changing innovations, that’s what it will take for the company to go from point A to point B.

As for QS stock hitting $40 in 2021, it’s probably a pipe dream. That said, if you’re a speculative investor, it’s worth the gamble. 

On the date of publication, Will Ashworth did not have (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.

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.