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With the dawn of electro-mobility and the resulting increase in electric vehicle (EV) production, the market for EV batteries has been growing over the past few years. However, the limited natural resources that are required to manufacture EV batteries, such as lithium and nickel, have made the prospects bleak for the industry. 

Moreover, investor optimism regarding the growth potential of the domestic EV battery market has allowed many stocks to garner significant momentum absent adequate revenue or earnings performance.

EV battery stocks Romeo Power, Inc. (RMO) and QuantumScape Corporation (QS) are cases in point. They have recently been trading at sky-high valuations without adequate strength in their business models to justify their valuations. Hence, we think it would be safer to avoid these stocks now.

Romeo Power, Inc. (RMO)

RMO is an energy and technology company focused on designing and manufacturing lithium-ion battery modules and packs for commercial electric vehicles. The company also offers battery management systems, as well as design, research and development, and other engineering related services.

On Dec. 29, 2020, RMO completed a combination with RMG Acquisition Corp. (RMG), a special purpose acquisition company, at a valuation of $900 million. However, RMO has not engaged in any operations nor generated any revenues to date. RMO’s loss from operations has increased 145.1% year-over-year to $639,274 in the fourth quarter ended Dec. 31. Its net income has decreased 174.7% from the year-ago value to a negative $491,685 over the same period.

RMO has a price/cash flow of 197.23x versus the industry average of 11.27x. Hence, the stock is extremely overvalued. Analysts expect RMO’s loss per share to increase 51.6% year-over-year to $0.47 for fiscal 2021 ending Dec. 31. The stock has lost 36.4% year-to-date.

RMO’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, which equates to Strong Sell in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

RMO also has an F grade for Value and Sentiment, and a D grade for Stability and Growth. It has recently been ranked #65 in the 68-stock Auto Parts Industry. Beyond what we stated above, we also have RMO grades for Momentum and Quality. Get all of RMO’s ratings here.

QuantumScape Corporation (QS)

Based in San Jose, CA, QS develops and commercializes solid-state lithium-metal batteries for use in electric vehicles. A class action lawsuit was filed against QS by various law firms over the past couple of months. The plaintiffs alleged that QS had made false and misleading statements to the market by overstating the purported success of its solid-state batteries, including battery power, life, and energy density.

This inflated the share prices and investors suffered damages when the market learned the truth about what the lawsuit alleges. This has caused instability and disruption in the normal functioning of the business, which was already negatively affected by the spread of COVID-19.

In terms of its forward price/book ratio, the stock has recently been trading at 22.41x, 509% higher than the industry average of 3.68x. QS’ loss from operations has increased 100% year-over-year to $30.19 billion in the fourth quarter ended Dec. 31, 2020. Its adjusted EBITDA has decreased 75.4% from the year-ago value to a negative $20.28 million, while its net loss has increased 4764.1% to $694.74 million over the same period.

Analysts expect QS to report a loss per share of $0.05 in the current quarter ending Mar. 31, 2021 and $0.21 for fiscal 2021 ending Dec. 31, 2021. The stock has lost 40% year-to-date.