The likes of DraftKings (NASDAQ:DKNG), Virgin Galactic (NASDAQ:SPCE) and Nikola Motors (NASDAQ:NKLA) have had enormous success in using special purpose acquisition companies (or SPACs, for short) to go public in 2020. So it should be no surprise that companies of all sorts — such as Kensington Capital Acquisition (NYSE:SPAC) — are coming out of the woodwork in hopes of finding similar success with SPACs.
Most of these companies won’t make it.
But one that will is QuantumScape, a disruptive solid-state lithium battery maker for electric vehicles that is going public through a $3.3 billion merger with blank check company KCAC stock.
Today, KCAC is a buy because QuantumScape has a unique and compelling opportunity to pioneer the disruptive transition in electric vehicle batteries from liquid chemistry to solid-state chemistry — a transition which will, if done successfully, unlock hundreds of billions of dollars in value across the global auto market.
Sure, a lot of companies are working in this space. But QuantumScape appears to have a big lead, and therefore, looks like the best investment opportunity to play solid-state battery disruption.
Without further ado, then, let’s take a deeper look at QuantumScape and KCAC.
KCAC Stock: Liquid Chemistry to Solid-State Chemistry
Traditionally, we think of batteries as the technology which makes things work.
But today’s batteries are actually keeping things from working as well as they could.
Sure, that seems counter-intuitive, so let’s take a quick trip back to chemistry class.
Batteries comprise three things. A cathode, an anode, and an electrolyte. Batteries work by promoting the flow of ions between the cathode and anode through the electrolyte.
Conventional lithium-ion batteries – which are currently the dominant status quo in smartphones, smartwatches, electric cars, so on and so forth – are built on liquid battery chemistry. That is, they comprise a solid cathode and anode, with a liquid electrolyte solution connecting the two.
These batteries have worked wonders for years. But, due to the physical constraints of dealing with a liquid electrolyte, they are now reaching their limit in terms of energy cell density – which basically means that if we want our phones, watches, and electric cars to last longer and charge faster, we need a fundamentally different battery.
Insert the solid-state battery.
With solid-state batteries, the name pretty much says it all. You take the liquid electrolyte solution in conventional batteries. Compress it into a solid. Create a small, hyper-compact solid battery that – because it has zero wasted space – lasts far longer and charges far faster.
Of course, the implications of solid-state battery chemistry are huge.
Solid-state batteries could be the key to making our phones sustain power for days, enabling our smartwatches to fully charge in seconds and allowing electric cars to drive for thousands of miles without needing to recharge.
But making solid-state batteries is a complex and costly science – and no one has figured out how to affordably or sustainably do it.
QuantumScape Has a Big Technology Lead
QuantumScape is such an exciting company — and KCAC stock is such an exciting investment opportunity — because this is an emerging battery tech company that is leveraging its novel and breakthrough technology to turn the promising theory of solid-state batteries, into an explosive reality.
Specifically, adoption of solid-state batteries has been essentially non-existent to-date — despite their theoretical superiority — for two big reasons: they are exceptionally expensive to make, and they tend to short-circuit because of something called “dendrites” which form in the solid electrolyte substance over time.
QuantumScape’s technology has addressed both of these shortcomings.
The company has employed an anode-less battery cell design which eliminates anode manufacturing costs, and brings QuantumScape’s all-in battery costs to 17% lower than all-in costs for traditional lithium-ion batteries. The company has also developed a streamlined process for sourcing its materials which should allow for scalable and cost-effective battery manufacturing.
Meanwhile, the company’s proprietary design includes a ceramic electrolyte with high dendritic resistance – and therefore, QuantumScape’s batteries don’t have dendrite problems.
Thus, by addressing the two largest short-comings of solid-state battery chemistry, QuantumScape has positioned itself to create a new class of EV batteries which are cheaper, last longer, charge faster and are just overall a better solution than the Lithium-ion status quo.
Multiple Other Advantages Too
Beyond great core technology, QuantumScape also has various other advantages, too, including a talented management team, big partnerships, seasoned investors and tons of capital.
The management team – headed by the former founder of Infinera and a Stanford grad – is essentially a handpicked team of the best-of-the-best of Stanford and Berkeley physics grads. Indeed, the company’s Chief Scientific Officer is the Chair of Mechanical Engineering at Stanford.
Meanwhile, Volkswagen – the world’s largest auto maker who is committed to electrifying its vehicle portfolio – has poured $100 million into QuantumScape and is committed to using the company’s solid-state batteries in its cars by 2025. And the company’s list of early investors includes Bill Gates. Yes. That Bill Gates.
At the same time, through the SPAC deal, QuantumScape will receive more than $1 billion in cash and funding commitments. Volkswagen also has a lot of cash to throw at the company. So does Bill Gates. Broadly, then, QuantumScape has sufficient resources to not worry about cash burn today and instead focus on the company’s long-term goal of becoming a ubiquitous, best-in-breed supplier of solid-state batteries into the EV industry.
All in all, from head-to-toe, QuantumScape is a good as it gets when it comes solid-state battery companies. And, to that extent, KCAC is the best way to play the solid-state battery disruption in EVs.
Huge Upside for QuantumScape Stock
If management does execute on that ambitious goal, the potential upside for QuantumScape stock is enormous.
QuantumScape plans to sell its batteries in 100 KWh packs, for about $7,000 per pack, and at about 30% gross margins.
Roughly 60 million new passenger cars will be sold this year. Thanks to population growth and urbanization, that number will grow to 75 million by 2030. Let’s say EVs – which comprise less than 5% of total new car sales today – rise to 35% penetration. Let’s also say about one-fifth of those EVs feature solid-state batteries, and that QuantumScape leverages superior tech to control about half of the solid-state auto battery market.
The math there implies $18+ billion in revenues for QuantumScape by 2030, with gross profits of $5.5-plus billion. My numbers suggest that could flow into $4 billion in net profits.
Based on a 20X multiple, that implies a potential future valuation for the company of $80 billion.
Based on the stock price today, KCAC sits at a market cap of roughly $6 billion.
Thus, the potential long-term upside in KCAC’s QuantumScape is truly gigantic.
Bottom Line on QuantumScape
Solid-state batteries are the future. Whoever pioneers this future will inevitably turn into a giant company.
Based the current market landscape, QuantumScape presently has a better opportunity that anyone else to pioneer this future. Admittedly, because it’s so early in the solid-state battery disruption, the risks are large. But so is the potential upside.
So buy KCAC as a high-risk, high-reward long-term play on solid-state battery disruption in EVs.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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