QuantumScape (NYSE:QS) is among the most promising startups working toward commercializing solid-state lithium-ion battery technology.
SSBs, which offer greater energy density, faster charging times and significant safety advantages, are expected to become widely used for electric vehicles as the technology improves.
Thanks to promising recent developments, QuantumScape shares are up by over 112 percent in just the last three months. Is QuantumScape a buy now, or has the stock risen too far and too fast?
Why QS Shares Are Soaring Now
QuantumScape’s soaring stock price were primarily caused by its announcement that its new process for manufacturing ceramic separators, a key component of its battery design, represented an efficiency improvement of 25 times compared to the previous process.
The new process, dubbed Cobra, is a major step forward in QuantumScape’s plans for commercializing solid-state technology at scale.
Also contributing to the recent spike in investor enthusiasm was QuantumScape’s announcement that it was expanding its existing partnership with Volkswagen’s battery group while also entering into a joint development agreement with a second auto manufacturer.
Under the new terms of the Volkswagen partnership, QuantumScape will receive up to $131 million as it meets development milestones.
Crucially, QuantumScape claims to have already hit early milestones in the project, meaning that payments related to the partnership should begin showing up in its results by the end of this year. This adds to the $130 million Volkswagen had already committed under an earlier form of the arrangement.
These partnerships are likely to be paramount to QuantumScape’s success, as its basic business model is to license the technology it develops to auto OEMs instead of engaging in the more capital-intensive business of mass manufacturing batteries on its own.
Volkswagen’s support for QuantumScape is particularly notable, as the automaker has set itself the goal of achieving 70 percent electric sales in Europe and 50 percent in the US and China by as soon as 2030.
Understanding QuantumScape’s Opportunities
To fully appreciate QuantumScape, it’s necessary to quickly take a look at the potential opportunities around solid-state lithium-ion batteries.
By some estimates, the global solid-state battery market could grow at a compounded annual growth rate of over 36 percent through 2033, causing it to grow from under $3 billion today to over $33 billion in a little less than a decade. As a potential leader in this market, QuantumScape could stand to benefit enormously from this growth trend.
Solid-state batteries will also likely replace existing lithium-ion battery technology in many applications beyond EVs. The higher energy densities and improved safety associated with SSBs make them a promising solution for grid-scale energy storage, something that will likely see increased demand in the coming years due to the pressure being put on electrical grids by AI data centers, EVs and other emerging technologies.
Can QuantumScape Support Its New Valuation?
One of the biggest hurdles for QS investors at the moment is likely to be the fact that the recent news sent QuantumScape’s valuation soaring without immediate financial benefits to the business.
This introduces a very real risk that QS shares could be overvalued, even though the recent developments will very likely be helpful as QuantumScape commercializes its batteries.
It’s worth noting that QuantumScape has blown past the average analyst price target of $6.23. Given the current price of the stock, investors would see a downside of nearly 30 percent at that price.
The recent run in share prices has also brought QuantumScape to a market capitalization of nearly $5 billion, despite there being no immediate timeline for the business generating substantial licensing revenues.
Where Are QuantumScape’s Risks?
Although QuantumScape’s technology appears very promising, it’s also important to acknowledge that the business is still a pre-commercialization technology startup that comes with significant risks. Among these is its cash burn rate, which totaled $274 million over the last 12 months.
For now, QuantumScape has ample liquidity and is estimated to have a cash runway through 2029. The fact that it is going through cash so rapidly, however, could be a problem if delays crop up that push back its timeline for commercial licensing.
QuantumScape has also made a consistent habit of diluting its shares, thereby eroding the ownership of longtime shareholders. Since the end of 2023 alone, the number of QS shares outstanding has risen from 462 million to 562 million. With significant commercial revenues still potentially several years away, it’s entirely possible that this trend will continue into future quarters. As such, investors may want to be wary of paying too high a price for a stock that could be hit by ongoing dilution.
Is QuantumScape a Buy Now?
With both a large market opportunity and promising technological advances, QuantumScape appears to be positioning itself for an early lead in the SSB market.
The new Cobra process will likely be key to achieving manufacturing scale, and QuantumScape’s development partnerships with auto OEMs could give it a ready-made customer base when its batteries are ready to enter mass production. It’s also difficult to deny the confidence Volkswagen’s battery group has shown in QuantumScape’s technology by committing hundreds of millions of dollars to support further development.
The risks, however, are also quite significant. QuantumScape has yet to demonstrate its ability to generate licensing revenues, and investors must guess about how large those revenues could be, how long they’ll take to materialize and what level of profitability QuantumScape could eventually attain.
In the meantime, the business is burning cash and will likely keep diluting its shares as it has up to now. These factors appear to make QS a highly speculative investment, even with its very real technological advances.
Overall, QuantumScape’s recent surge may have brought it to a point where it could be primed for a downward correction. With shares having more than doubled over such a short time frame without fundamental changes in the business’s performance, it’s far from difficult to imagine QS moving lower on practically any signs of bad news or delays in commercialization. QS appears to be a high-risk, high-reward stock, but the risk may be too high for many investors to buy at today’s prices.
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.