On Sept. 3, Kensington Capital Acquisition Corp (NYSE:KCAC) agreed to merge with an EV battery maker, QuantumScape. The deal has an implied enterprise value of $3.3 billion and will provide $1.1 billion in cash and funding commitments to QuantumScape.
The company is developing next-generation solid-state lithium-metal batteries, as opposed to lithium-ion batteries presently used in electric vehicles. These are known as solid-state electric batteries. The company has a deal with Volkswagen (OTMKTS:VWAGY) to install its batteries in their cars.
The stock symbol and the warrants will change their symbol to QS and QSW respectively when the merger closes.
Kensington Capital’s Estimates
Right now Kensington Capital is trading for $18.73 per share and has a market value of $540 million for its 28.75 million shares outstanding. The company claims that, based on its expected 2027 sales, the enterprise value will be $3.3 billion.
We can use that information to estimate the market value. For example, QuantumScape expects to receive $1.15 billion in cash from equity sales and QuantumScape’s existing cash at the close of the merger.
Since an enterprise value calculation adds in debt and subtracts cash, we can reverse out the cash to estimate the market capitalization. So $3.3 billion added to the $1.15 billion in cash means the estimated 2027 market capitalization will be $4.45 billion.
I suspect that is worth at least 50% above the price at which it was trading prior to the announcement, or $22 per share. Part of the reason for this is because QuantumScape has its own significant assets. For example, it has $471 million of its own cash of $484 million in addition to over 200 patents, based on page 7 of its slide presentation.
QuantumScape has built a business on the concept that lithium-metal is the next generation battery after lithium-ion. That makes it a solid-state battery which will be safer than lithium-ion. Volkswagen is a core customer. It formed a joint venture to mass-produce solid-state batteries for Volkswagen.
Valuing Kensington Capital
More importantly, the company has provided a useful projection of revenue on page 28 of its slide presentation. This shows that it expects to make $808 million in EBITDA by the end of 2027. Sot its present post-closing EV of $3.3 billion will be 4 times EBITDA.
Moreover, the next year EBITDA will be $1.62 billion. That puts it at 2 times EV/EBITDA in 2028. Obviously that is too low. By that time the market value would be at least 4 times that amount, or $13 billion in EV, or $14 billion in market cap.
Discounting that back to the present at 10% over 8 years at 46.65% of its $14 billion market cap, or $6.53 billion. This is about 47% above its present $4.45 billion market cap post-merger.
So, in effect, Kensington Capital is worth around 50% more than its present price. And that is just if you value the company at 8 times EV to EBITDA in eight years, discounted back to the present.
If it gets a higher valuation then, like a Tesla (NASDAQ:TSLA) valuation, the stock is worth much more. For example, if its relationship with Volkswagen takes off even further, or they take on larger clients than expected, then its estimated EBITDA and sales could be higher. That could lead to a higher price as well.
Questions Why Tesla Is Absent
However, there are some critics. This investor on YouTube, Dave Lee, points out that Tesla is also experimenting with lithium-metal batteries. But they are going in a different technical direction than QuantumScape.
Tesla is apparently experimenting with using a liquid electrolyte instead of a metal electrolyte, although still using lithium metal as an anode. In other words, Tesla has sort of rejected QuantumScape’s approach. They don’t want to use QuantumScape’s solid-state technology. There is no mention of Tesla at all in QuantumScape’s presentation.
So keep that in mind when investing in QuantumScape. That is a clear red flag. Why would the largest EV maker in the world not be willing to use their technology? In other words, QuantumScape will have to work harder to get to this valuation than they would otherwise if they had Tesla as a client.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.