QuantumScape (NYSE:QS) is one of the leading startups attempting to commercialize lithium solid-state batteries. SSBs have the potential to deliver both higher energy densities and improved safety for applications such as electric vehicles, making them potentially extremely valuable once they can be produced at commercial scale.
Shares of QS are up more than 25 percent in just the last five days and over 100 percent in the last month. Why did QuantumScape go up so much, and can the stock support these suddenly higher prices going forward?
QuantumScape + Corning Sparked Excitement
The most recent uptick in QS share prices is largely attributable to a newly announced partnership with Corning Incorporated that could accelerate the production of the ceramic separators necessary for QuantumScape’s SSBs. Corning, a specialized leader in glass and ceramic manufacturing, will work in conjunction with QuantumScape to develop improved methods for producing separators at commercial scale.
Somewhat uniquely, QuantumScape’s business model involves licensing its designs to automotive manufacturers instead of making and selling its batteries directly.
Developing improved manufacturing technologies for battery parts, therefore, could increase the value QuantumScape offers to the businesses to which it licenses its designs and help to speed its batteries toward factory-level commercialization. At the same time, improved manufacturing gives QuantumScape the ability to increase the volume of samples it can provide to automakers eyeing its batteries.
It’s also worth noting that Corning is far from the first important partnership QuantumScape has made as it has worked to commercialize SSBs. Among the most important partnerships the business has established is with Volkswagen, a major backer of QuantumScape’s SSB development.
Where Is QuantumScape’s Business Right Now?
Though there could be massive future potential in developing SSBs, it’s important for investors to get a sense of where QuantumScape is at the moment. While the business is still pre-revenue, it has secured payment agreements for hitting certain milestones with PowerCo, Volkswagen’s battery group. In the Q2 shareholder letter, management detailed an expanded agreement with PowerCo that will result in $131 million of revenue. In addition, QuantumScape claims to have already hit the earliest milestones necessary for an initial payment of $10 million, putting it on track to deliver revenue in the fairly near future.
In addition to Volkswagen, QuantumScape has also entered a development agreement with another major OEM. While it’s not yet clear which other automaker QuantumScape is working with, management appears to be making moves in the right direction to create a customer base for the business’s SSBs once they are ready to be produced at commercial scale.
QuantumScape’s balance sheet is also impressively strong, a fact that could help the business keep its R&D expenses up until it can begin to generate sales. As of the end of Q2, QuantumScape had $1.17 billion in total assets, including nearly $800 million in cash, cash equivalents and marketable securities. These assets handily outweigh the business’s $143.6 million in total liabilities.
On the whole, QuantumScape remains a speculative business, but one that is making real moves toward commercialization. With the backing of Volkswagen, partnerships with other key manufacturers and a solid balance sheet, QuantumScape appears to have positioned itself fairly well to deliver on its promise of commercial SSBs. With that said, it’s important to keep in mind the risks of investing in pre-revenue startup businesses.
Has QS Become Overvalued?
One of the fundamental difficulties of QuantumScape stock is the fact that its valuation is, to a large degree, speculative and based on optimistic assumptions about earnings that could still be years away. Despite a lack of revenues and ongoing losses, the business has reached a market cap of $9 billion, nearly 9 times its book value. The stock is also trading toward the top of its 52-week range on news of the Corning partnership, suggesting that bullish market sentiment may have carried the stock to highs that it could have difficult maintaining.
The difference between QS’s current price and the price targets offered by analysts could also be a red flag for the stock’s valuation. Price targets for QuantumScape range from a low of $2.50 to a high of $11.00, with an average consensus of $6.23. Shares of the business, however, have risen far above even the highest target to trade at $15.90. If QS falls back to the average price target, it would lose over 60 percent of its current value.
Though the recent partnership with Corning may justify some of the premium that the market is assigning to QS, there’s still a good chance that the stock is overvalued at current prices. The consensus rating from analysts on QuantumScape is also a hold, suggesting at least some apprehensiveness around the stock. This apprehensiveness is also reflected in institutional trading activity, as large investors have been consistently selling more shares of QS than they’ve been buying for well over a year.
Is Now the Time to Buy QS?
There’s little denying that QuantumScape has made great strides in preparing to commercialize its SSB technology. The backing of an auto major like Volkswagen is of key importance, as QuantumScape has a valuable customer already lined up for its battery technology. QuantumScape’s strong financial footing is also deeply positive, as it’s likely to be some time before the business can generate revenue or deliver positive cash flow.
The problem, however, is that QuantumScape’s share prices have skyrocketed on the strength of the Corning agreement and the expanded partnership with Volkswagen’s PowerCo. With meaningful revenue still a way off and positive earnings likely still several years down the road, it’s entirely possible that the market’s bullishness on QS could put shareholders who buy at today’s prices at a disadvantage.
Right now, QS is likely a hold. While the business shows considerable promise, the stock is both quite speculative and quite highly valued. As such, QuantumScape may be too risky for all but highly risk-tolerant investors to take an interest in until the business’s trajectory becomes clearer or the price becomes more reasonable.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.