Investors considering making an investment in Kensington Capital (NYSE:KCAC) should understand that they are exercising an appetite for risk. Kensington Capital will take QuantumScape public through a reverse IPO. QuantumScape is a 10-year old battery startup out of Silicon Valley which will form a joint venture (JV) with Volkswagen (OTCMKTS:VWAGY). The JV will produce solid-state batteries first for application in Volkswagen vehicles, and later for other manufacturers.
Thus, an investment in KCAC stock is an investment in an unproven technology in solid-state batteries. Further, it is an investment in a JV collaboration which is wrapped up within a shell company in Kensington Capital.
When the deal closes later this year the new equity will trade under the ticker QS on the New York Stock Exchange.
Big Names on Board
Volkswagen is central to this deal, but Kensington Capital has several other big name investors on board with its stock. Portfolio companies Kleiner Perkins and Khosla Ventures have invested. Bill Gates and the Qatar Investment Authority have invested. Also within the auto industry, Shanghai Autos and Continental have invested.
The reason this is important for investors to take note of is because such announcements may bolster individual investors’ risk propensity. I mention this to provide a word of caution. When potential investors read that these big names are on board with KCAC it lends authority to it as an investment. And big name authority is a very effective form of persuasion.
Venture Capital Investment vs. Individual Investment
However, we individual investors are simply different than the massive entities listed above. We are likely to be much more risk averse than they are.
Let’s imagine that a venture capital (VC) fund directs 5% of its capital to a SPAC and an individual does the same. That 5% is not equivalent in the sense that it is absolutely smaller. That capital also holds less sway. It’s also likely written off as a bet for the VC. VC funds are willing to bet big because they have large sums of money. Investment psychology is different at that scale even if the percentages are equivalent.
All of this is to say exercise caution. Because while new technology like the solid-state batteries QuantumScape and VW are joining up to produce is exciting, it’s speculative.
Future Tech
QuantumScape is focused on producing solid-state battery cells for application in the automotive industry. Solid-state battery cells represent a quantum leap over lithium ion batteries which power today’s EVs.
That is, if they ever come to market. The QuantumScape/VW joint venture is slated to produce its solid-state batteries in 2024. That could be four full years from now if the batteries begin being manufactured late 2024.
Solid-state batteries do seem to be the next evolutionary step in battery energy storage. I’m certainly no expert on the technology, but the point here is not about that. The point is that your investment represents capital that won’t produce tangible results — actual batteries — for some time.
Your ROIC
Companies that have a high return on invested capital are the type that I normally recommend. That return usually manifests itself as services and products which have good margins. KCAC can’t be that kind of company for a few years at minimum.
Investor dollars now are funding the idea of a solid-state battery pack which may never come to fruition. If investment dollars were funding planned production of a solid-state battery pack which was at the production stage, this would be more appealing. There is a big difference here.
Kensington Capital would be happy to have you, the individual investor, put your capital towards the idea of a QuantumScape/VW solid-state battery. If it comes to market it should significantly cut down charging times as the company claims an 80% charge in 15 minutes. Battery size might be decreased as well due to greater energy density per kilogram.
Further, it would solve the cost problem as lithium ion batteries are expensive and are not anticipated to decrease in price soon. If Kensington Capital/QuantumScape/VW solve this problem, investors who purchase shares now and wait it out will be rewarded handsomely. If not, returns will be next to nothing.
Kensington Capital Stock Takeaway
KCAC poses a question of risk appetite. It also poses a question for investors regarding time-value of money given the time horizon of actual production. This isn’t a scam company. It’s a highly speculative company trying to define a new technology with massive potential. But right now, I just don’t see that there’s enough proof of concept to justify investing as an individual and not a VC.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
