Kensington Capital Acquisition (NYSE:KCAC) is a special purpose acquisition company (SPAC) entering the electric vehicle space. Before your eyes glaze over, though, fear not — there’s a cool twist to this one. Kensington isn’t yet another of the seemingly endless new EV companies designing a prototype car or truck. Rather, it aims to create the next generation of batteries that will power the EV revolution.
Batteries have long been a sticking point, both for EVs and many other applications such as laptop computers and smartphones. Simply put, we seem to be near the technical limits of existing lithium-ion technology. There are harsh physical and chemical barriers to significantly improved performance.
As such, there is potentially an absolutely gigantic market for a battery start-up that ditches lithium-ion and instead makes a leap forward with some other baseline technology.
QuantumScape: Redesigning Batteries
That’s where Kensington Capital enters the picture. It will be merging with QuantamScape, a battery development company. QuantamScape’s mission is “enabling a mass market transformation.” It seeks to help electric vehicles reach the tipping point in the effort to replace internal combustion engines.
A major roadblock so far has been that the battery packs in EVs are expensive, are unreliable, and degrade quickly. In the past, even Elon Musk has acknowledged that batteries aren’t yet quite where they need to be. QuantumScape aims to solve this using solid-state batteries. These get rid of host material in the battery, thus improving energy density. This allows 15-minute recharges and reduces the flammability of the battery.
That all sounds great on paper, but will it work? At least one major auto manufacturer thinks so. Volkswagen (OTCMKTS:VWAGY) has invested in QuantumScape and will also be using QuantumScape batteries, once they are available, in some of its cars going forward. This already puts Kensington Capital ahead of other EV companies. It has a high-caliber backer/lead customer and access to funding for years.
Before we get too excited about Kensington Capital, let’s consider a few potential risks. As always, you should use more caution with SPACs than you would with an initial public offering (IPO). Generally, companies can obtain better valuations from IPOs than SPACs and IPOs are often more credible, so it’s worth asking why a company might avoid the IPO process.
In this case, the issues around solid state batteries may be a factor. InvestorPlace’s Josh Enomoto had an excellent article highlighting these risks. Namely, the scientific challenge here is brutally complex, and many other companies have failed to commercialize solid-state batteries. If you can develop a solid-state battery at a good price and with consistent recharging, you’ll achieve the holy grail. But tons of other firms have poured research and development capital into this market without success.
QuantamScape’s slow-moving timeline likely reflects this. Even if things go to plan, the company doesn’t anticipate commercial battery deliveries starting until 2024. Usually companies don’t go public if the don’t intend to generate revenues anytime soon. There’s nothing wrong with this. However, keep in mind this is more like venture capital investing than buying a traditional company with profits and revenues.
The Kensington Capital Stock Verdict
As far as the rush of electric vehicle SPACs goes, I’d rate this one pretty highly compared to much of the competition. This company has great backers, a clear product vision and the potential to be a huge business if the technology works.
There’s an obvious reason why this came public via SPAC though. With no meaningful revenues coming until at least 2024, and not reaching a billion in sales until 2027, this is ages from being profitable.
That’s perfectly fine, and patient investors could have a major win on their hands. It’s rare that companies at such an early stage of development sell shares to the public. That amplifies both risk and the potential reward. Investors here should know it will be a long and winding road between now and whenever this company starts delivering meaningful quarterly earnings. If you don’t mind waiting though, this could be worth taking a starter position in.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.