Ralph Waldo Emerson is attributed with saying “Build a better mousetrap, and the world will beat a path to your door.” That’s a statement that investors should consider before putting their capital to work with Kensington Capital (NYSE:KCAC). Is the special purpose acquisition company (SPAC) truly helping bring public a company that has a better mousetrap? Or does Kensington Capital stock have another idea that will never realize its potential?
The answer is critical. Kensington Capital is bringing the battery development start-up QuantumScape public via a reverse merger. While some investors scoff at the reverse merger concept, it’s become quite popular in 2020 as an alternative to traditional initial public offerings.
But that’s not the risk nor the mousetrap I’m referring to. QuantumScape is developing rapidly charging batteries for electric vehicles (EVs). The company is touting that its solid-state batteries will charge to 80% capacity in just 15 minutes. And, the company claims its batteries will be safer than current EV batteries.
For investors who really want to dive in to the EV battery subject, read Luke Lango’s article that describes QuantumScape’s solid-state battery design. It could be a real innovation.
In a bullish article for Kensington Capital stock, Will Ashworth outlined the company’s founding. QuantumScape chief executive officer Jagdeep Singh realized the Tesla (NASDAQ:TSLA) he owned had a less than ideal battery. In an interview with Fast Company, Singh remarked, “I realized that if you could make a better battery, you could really change the world.”
However, changing the world will have to wait until 2024. That’s when QuantumScape’s batteries will hit the market.
So investing in Kensington Capital stock is not about accepting that a rapidly charging EV battery is a better mousetrap today. The question is, if it will still be a big deal in 2024?
A Fast Charging Vehicle Is in Demand
A 2019 survey from Autolist found that the lack of a charging infrastructure and long charging times were two key obstacles to buying an electric car. That makes sense. The idea of an electric vehicle has really become one of economic stewardship more than environmental stewardship.
Combustion engine cars have a lot of things that can go wrong with them. And even car enthusiasts find that working on them these days is challenging. Electric vehicles have a value proposition beyond price. But they also have a renewable resource that requires a developed infrastructure that is currently lacking.
That is creating the chicken and egg question. Will we develop a charging infrastructure first? Or will we develop better battery technology? My bet would be on battery technology. That would seem to make a bullish case for Kensington Capital stock.
Batteries Are a Big Deal
A common obstacle for EV purchases, even among early adopters is their price premium. And the single biggest reason for this difference is the battery. Companies have been taking different approaches to resolve this issue.
Tesla held its “Battery Day” event in September. While the day was largely much ado about a future something, it hasn’t slowed investor’s enthusiasm for the stock. On battery day, the company revealed its plans for a “million mile” battery car. The idea is that the battery could last the lifetime of the car.
And Tesla also discussed its plans to reduce the cost of its lithium-ion battery cells and packs to a price per kilowatt-hour that will make EVs comparable in price to combustion engine vehicles.
This is significant because Tesla’s approach has always been to improve on the existing battery designs. And as Larry Ramer points out, Tesla claims its superchargers can do a full recharge in approximately 30 minutes today.
Nio (NYSE:NIO) is taking a different approach by embracing a battery-as-a-service (BaaS) model that will essentially decouple the price of the car from the battery price. Nio only sells its EVs in China at this time. And that market is more set up for that kind of service.
What this means is that companies are already working on developing more efficient, faster charging batteries. And competitors have four years to make more improvements before QuantumScape’s batteries hit the market.
Kensington Capital Stock Is Compelling
Before you think I’m dismissing the company’s opportunity, I’ll point out that in addition to Microsoft (NASDAQ:MSFT) founder Bill Gates, QuantumScape has the backing of Volkswagen (OTCMKTS:VWAGY) which is promising to use its battery in all their vehicles.
That will help seed QuantumScape’s design into the market regardless of whether other manufacturers climb on board. And that removes a key risk in my mind. That is, will the company’s products make it to market?
The economic outlook for 2021 is still uncertain. Will that delay the company’s plans? With that said, I’m sold that Kensington Capital has a better mousetrap. It’s up to you to decide if and when to jump on this opportunity.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.