QuantumScape (NYSE:QS) is on the forefront of solid-state lithium-metal battery expertise, aiming to revolutionize the automotive trade by providing higher vary, shorter cost occasions, improved security, price effectivity, and enhanced battery life. As the corporate strikes nearer to product qualification and commercialization, there are undoubtedly excessive expectations for its potential. Nevertheless, with an absence of profitability and an unclear future, our funding thesis stays impartial on the inventory, as we can’t precisely worth the corporate primarily based on future money flows.

Enterprise Evaluation

QuantumScape, established in 2010, has been on a mission to develop considerably higher batteries to speed up the mass market electrification of autos. The corporate believes that to realize mass market attraction, autos want to supply higher vary, shorter cost occasions, improved security, price effectivity, and enhanced battery life in contrast to what’s at the moment obtainable. To be able to obtain this degree of efficiency, QuantumScape focuses on solid-state lithium-metal chemistry, which they consider is the important thing to unlocking considerably larger power density and improved charging occasions.

Because the leaders in commercializing solid-state lithium-metal chemistry for the automotive trade, QuantumScape has demonstrated the efficiency of its prototypes in numerous checks. One check, particularly, which the corporate views because the gold normal for automotive batteries, is charging from 0% to 100% in 1 hour and sustaining 80% capability after 800 cycles. In December 2010, QuantumScape showcased solid-state lithium-metal chemistry performing to this normal for the primary time.

Since going public in 2020, the corporate has made important progress by showcasing outcomes from single-layer, 4, 10, 16, and 24-layer cells. The 24-layer cells are particularly thrilling as they provoke the formal A-sample qualification course of for no less than one automotive OEM, marking a major milestone within the firm’s journey in direction of product qualification and commercialization.

QuantumScape has established partnerships with six automotive OEMs, with Volkswagen being their most outstanding and deeply concerned accomplice. Volkswagen holds two seats on QuantumScape’s board, has made a number of investments within the firm, and has a three way partnership for the primary commercialization of the solid-state batteries.

In our evaluation, we discover that bulls consider that QuantumScape is at a vital inflection level, with the potential to revolutionize the automotive battery market. The demand for higher batteries is immense, given the rising want for electrical autos to fight the 30% of world emissions ensuing from transportation. Along with the automotive trade, QuantumScape’s solid-state lithium-metal chemistry has potential purposes in different sectors that require smaller, lighter, faster-charging, and safer batteries.

Nevertheless, we consider bulls are usually not in management right here given the inventory’s over 50% decline over the previous yr and its somewhat excessive 21% quick curiosity.

Considerations

QuantumScape Company, a pre-revenue solid-state battery maker, faces a number of dangers and issues that traders ought to fastidiously take into account earlier than committing to proudly owning its shares.

Though QuantumScape is driving the huge secular tailwinds of electrical car (EV) adoption, with China main the way in which and the US in its nascent stage, the corporate remains to be removed from quantity manufacturing. We consider there’s appreciable work wanted for QuantumScape to realize business ramp and traders might face potential additional dilution sooner or later. With a projected collected free money circulation of -$1.2B via 2024, even earlier than its anticipated business ramp in 2025, it is no marvel that the corporate stays a favourite for short-sellers.

One other concern for QuantumScape is proving its manufacturing prowess on its nascent expertise. The corporate has recognized the chance to widen its adoption to client electronics, leveraging its solid-state batteries’ means to run with zero externally utilized strain. Whereas this might doubtlessly increase QuantumScape’s use circumstances for its battery expertise, administration has but to current the economics of such a breakthrough and business ramp to traders.

Furthermore, QuantumScape faces competitors within the client area, with corporations like Imprint Power additionally engaged on stable electrolyte for client IoT units. Regardless of the current restoration in QS share value, the corporate’s unprofitable enterprise mannequin and distance from profitability make it difficult to mannequin its anticipated free money circulation via 2025.

Trade Overview

Readers might acquire a greater understanding of the aggressive dynamics mentioned earlier with an summary of the trade.

The worldwide transition to electrical autos (EVs) is driving a surge in demand for batteries, with EVs accounting for 10% of world car gross sales in 2022 and projected to achieve 30% by the tip of the last decade. This transition is additional fueled by local weather laws and insurance policies worldwide, akin to bans on gas-powered autos and investments in battery manufacturing. On this context, batteries will play a vital function within the transition to renewable power, and new developments within the subject are anticipated to have a major affect on the trade.

Lithium-ion batteries are the dominant expertise for EVs at the moment, however there’s appreciable room for enchancment. Researchers are exploring methods to spice up capability, velocity charging time, and cut back prices. Considerations in regards to the provide of key battery supplies like cobalt and lithium are additionally pushing the seek for alternate options to straightforward lithium-ion chemistry.

Strong-state batteries are an rising expertise to observe, as they substitute the liquid electrolyte in lithium-ion batteries with stable supplies like ceramics. This shift might result in extra energy-dense batteries with quicker charging occasions and improved security. QuantumScape is a number one participant on this area, specializing in lithium-metal solid-state batteries and having secured a partnership with Volkswagen to doubtlessly incorporate their batteries into automobiles by 2025. Nevertheless, important challenges stay by way of degradation and manufacturing, that means that solid-state batteries is not going to be broadly obtainable within the quick time period.

One other promising expertise is sodium-ion batteries, which use sodium as an alternative of lithium as the principle chemical ingredient. Whereas they might not enhance efficiency, they’ve the potential to cut back prices as a consequence of their reliance on cheaper and extra considerable supplies. Chinese language battery big CATL plans to start out mass-producing sodium-ion batteries in 2023, however their suitability for EV purposes stays unsure. Consequently, some corporations, like US-based Natron, are initially concentrating on much less demanding purposes, akin to stationary storage or micromobility units.

Stationary grid storage is a rising market, pushed by the rising deployment of renewable energy sources like wind and photo voltaic. Lithium-ion batteries are usually not best for this software as a consequence of their main deal with dimension, weight, and velocity. Iron-based batteries are rising as a powerful contender on this area, with corporations like Kind Power and ESS making important progress on their respective applied sciences.

Lithium-ion batteries will proceed to enhance in efficiency and value, pushed by the necessity to mitigate the worth volatility of battery supplies. One potential breakthrough is the event of lithium iron phosphate (LFP) as a low-cost cathode materials for lithium-ion batteries. This different might play a major function within the trade as researchers look to cut back dependency on costly supplies like nickel, manganese, cobalt, and lithium.

Monetary Evaluation

Our evaluation of QuantumScape reveals an organization that’s regularly bettering its monetary efficiency, as evidenced by the narrowing of working losses by 7% quarter-over-quarter, from -$121 million in Q3 2022 to -$113 million in This fall 2022. The precise This fall 2022 working losses got here in 3% higher than the Wall Avenue analysts’ consensus estimate of -$116 million, in response to S&P Capital IQ information. As well as, the corporate recorded a narrower internet loss per share of -$0.25 in This fall 2022, representing an enchancment from the Q3 2022 internet lack of -$0.27 per share. This current quarterly backside line additionally surpassed the sell-side’s consensus EPS projection of -$0.26.

Regardless of these optimistic monetary outcomes, QuantumScape’s inventory value fell by 17% from $11.84 on February 15, 2023, to $9.81 on February 16, 2023, following the This fall 2022 outcomes announcement. This means that investor sentiment stays cautious, presumably as a consequence of issues in regards to the firm’s means to realize profitability and execute on its progress plans.

QuantumScape’s deal with maximizing capital effectivity in its QS-0 pre-pilot line, concentrating on year-end supply of apparatus wanted for early manufacturing, signifies a strategic dedication to reaching operational milestones. In our opinion, the corporate’s efforts to enhance monetary efficiency, coupled with its emphasis on capital effectivity and operational progress, might bode effectively for its future progress prospects. Nevertheless, the market’s detrimental response to the This fall 2022 outcomes highlights the necessity for the corporate to proceed demonstrating progress in direction of profitability and executing its progress technique to regain investor confidence.

Conclusion

QuantumScape’s ground-breaking expertise and partnerships with main automotive OEMs reveal its potential to remodel the electrical car trade. Nevertheless, the corporate’s present lack of profitability and unsure future make it troublesome to precisely worth primarily based on projected money flows. Consequently, our funding thesis stays impartial on QuantumScape’s inventory. Buyers ought to fastidiously monitor the corporate’s progress in direction of profitability and execution of its progress technique to find out whether or not the inventory turns into a extra viable long-term funding.