Battery tech startup QuantumScape (NYSE:QS) has surged more than 50 percent YTD. To understand the forces propelling QuantumScape higher, it’s first necessary to take a look at what the company does.
QuantumScape is a development-phase technology company attempting to commercialize solid-state battery (SSB) technology. SSBs are widely believed to be the best replacement technology for the lithium-ion batteries that currently power electric vehicles.
SSBs offer greatly improved energy densities compared to the current generation of liquid lithium batteries. In QuantumScape’s case, the density is estimated at 400W h/kg, more than half again the typical density of a liquid battery.
The company’s battery can also be charged up to 80 percent in only about 15 minutes, making it vastly more efficient and consumer-friendly than the batteries currently deployed in EVs. SSBs may even solve many of the safety problems associated with liquid batteries in the event of vehicular crashes.
QuantumScape Investment Thesis
In addition to attempting to manufacture SSBs on a commercial scale, QuantumScape has allegedly solved the cost problem regarding this next generation battery technology.
By eliminating the use of an anode host material to create its batteries, QuantumScape has managed to bring its total manufacturing costs about 17 percent lower than those for traditional lithium-ion batteries. SSBs are famously expensive to produce, making them too costly for commercial use at the moment.
QuantumScape also claims to have solved another obstacle to mass SSB adoption, namely that of lifespan. Unlike liquid lithium-ion batteries, SSBs are prone to cracks in the solid materials used to store energy. These cracks gradually hamper performance and eventually degrade the battery. QuantumScape, however, appears to have solved this problem.
By 2030, the total global value chain for lithium-ion batteries is forecast to be worth as much as $400 billion. If QuantumScape can successfully commercialize SSBs, the company’s potential revenues as a key provider of more efficient, faster-charging and safer battery technology could be enormous.
A final point in the bull thesis for QuantumScape is its healthy research and development budget relative to its expenses. The company currently holds practically no long-term debt and nearly $1 billion in current assets. With only $43.5 million in current liabilities, the company can deploy nearly all of its significant capital reserve to develop and eventually manufacture its batteries.
Why Did QuantumScape Stock Go Up?
QuantumScape’s most recent share price run began with the release of a new investor presentation in June that detailed the company’s attempts to improve efficiency and produce a consistent product. While far from a revelation on QuantumScape’s operations, the report appears to have been enough to generate new investor enthusiasm.
The company may be riding a much more general wave of investor interest in new EV battery technologies. Market observers have noted that QuantumScape’s rise coincided strongly with a similar run for Freyr Battery.
In Freyr’s case, investors drove the stock up over 20 percent following successful battery tests and management assurances of a strong demand pipeline. The general interest in EV batteries may help to explain why QuantumScape has surged in spite of a lack of significant business developments.
QuantumScape Analysts Target
At $8.61 per share, QuantumScape has considerably exceeded most analyst price forecasts. The median price target for QuantumScape is $5, more than 40 percent below the current price.
Even the highest analyst forecast places the stock at $10, only about 16 percent above its present trading price.
Red Alert: Pay Attention to Sales
However appealing the company’s technological proposition may be, investors have effectively no sales or profitability data on which to base investment decisions.
The company maintains a return on equity of -31.4 percent. While this would obviously change if QuantumScape were generating revenue and incurring manufacturing costs, there’s no telling exactly what the numbers will look like if the company ever reaches that point.
QS is also facing competitive pressures from much more established businesses. Auto giant Toyota is chief among these.
Toyota, which had already planned to introduce EVs powered by solid-state batteries, recently announced a major manufacturing breakthrough related to its battery development.
Once commercialized, Toyota’s SSBs could charge in as little as 10 minutes and carry one of its vehicles more than 700 miles on a single charge. Given Toyota’s vastly superior resources and existing market share, this development could be a major long-term blow to QuantumScape’s prospects.
Finally, the scope of insider selling suggests that management may not have substantial faith in the company’s long-term prospects.
Over the last 12 months, insiders have sold nearly $30 million of QuantumScape stock and bought none. Although insider ownership at QuantumScape remains at over 10 percent, this trend raises concerns for investors who are banking on revenue and earnings that may take many years to materialize.
Is QuantumScape in For a Correction?
Ultimately, QuantumScape is a company with a fascinating technological edge in a high-demand field. Investors are understandably drawn to the company’s proposition, as there is indisputable potential in a commercial SSB that is cheaper to produce than a traditional lithium-ion battery.
The problem, however, is the sheer uncertainty attached to QuantumScape. While the company has shipped samples of its batteries, it is still in the development phase. There is not yet a clear picture of how the company will price its batteries, how many it can sell or how much profit can be made. As such, its stock price is based far more on investor sentiment than on real-world fundamentals.
Taking these factors into consideration, QuantumScape seems like a company that is likely to see a significant correction as investor enthusiasm cools. QS stock appears to be a Sell. Until more questions about its business potential can be answered, the company is simply too risky for the vast majority of investors.
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