One thing is for certain: Kensington Capital (NYSE:KCAC) is going to be a fascinating company to watch over the next decade. Almost everything else about Kensington Capital stock, however, remains up for debate.

Kensington Capital is planning to merge with QuantumScape, a developer of batteries for electric vehicles. It’s QuantumScape’s future that matters. As a SPAC (special purpose acquisition company), Kensington Capital is contributing cash (raised by the sale of KCAC stock) to help fund QuantumScape’s development. (Third-party investors are buying in as well.)

And QuantumScape’s future could play out in a number of ways. There are reasons to believe that QuantumScape will become a force in EV batteries, and thus a key supplier to one of the world’s fastest-growing industries. In that event, what is now Kensington Capital stock and will, post-closing, likely be called QuantumScape stock would generate impressive returns.

But there is no shortage of risks. Investors have bid up EV stocks this year amid a growing belief that adoption will accelerate in coming years. That forecast may prove too rosy. Even if it isn’t, QuantumScape itself doesn’t see material revenue coming in for years. In the interim, competition will be stiff, and more capital will be needed at some point. Any disappointments along the way could make raising that capital more difficult, and lead the stock downward before production has even begun.

The bull case certainly is intriguing. In the most optimistic scenario, KCAC shareholders almost certainly will make multiples of their initial investment. But there’s a long path to get there, in terms of both time and risk. At the least, investors need to know what they’re getting into.

2028 Estimates

What’s the world’s leading battery supplier worth? It’s a key question for KCAC stock — and it’s unanswerable at the moment.

After all, countless factors go into an investor’s estimate of the answer. How fast does the EV industry grow? What market share counts as leading? How many competitors? What are the batteries priced at? What do they cost to make?

It’s impossible to accurately answer those questions at the moment. But Kensington Capital and QuantumScape attempted to at least make a guess. In an investor presentation last month, the company modeled revenue, profits, and free cash flow out to 2028.

Again, the figures are guesses. But QuantumScape and Kensington presumably have better tools to make educated guesses than most of us (even if, presumably, they’re far more likely to be too optimistic than too pessimistic.)

In 2028, QuantumScape expects revenue of about $6.5 billion. EBITDA (earnings before interest, taxes, depreciation and amortization) would come in at over $1.6 billion. Free cash flow would clear $500 million.

What’s Kensington Capital Stock Worth?

What, exactly, those metrics mean for the Kensington Capital stock price too is uncertain. But the company notes that Nio (NYSE:NIO) trades at 6.5x revenue, and Tesla (NASDAQ:TSLA) twice as high. The former multiple would value QuantumScape in 2028 at about $42 billion; the latter about $85 billion.

50x free cash flow — not out of line for what would still be a growth company — gets to $28 billion. 30x EBITDA values QuantumScape at roughly $50 billion.

There’s a huge range between those valuation estimates — none of which are definitive. There’s no specific reason why 50x free cash flow makes more sense than, say, 42x.

And there’s a big difference between the three stories. An investor could argue that Kensington Capital stock would deserve a premium to the current multiples Tesla and Nio, given higher projected margins. She could also argue that it deserves a discount to TSLA in particular, given that Tesla has a far broader portfolio.

But investors need to take the broad view. At the current Kensington Capital stock price, and accounting for the fact that the capital being raised will be spent in the next few years, QuantumScape is valued at less than $7 billion.

In other words, if QuantumScape hits its targets, investors should reasonably expect 300% returns — at least.

Hitting The Targets

Of course, in this model those returns take eight years or so. Still, that’s an exceptional pay-off for that kind of patience.

Obviously, the question is if QuantumScape will hit its targets. For a number of reasons, it’s far from guaranteed. The company expects to have over $1 billion in cash once the merger closes. But all of that cash will be spent, based on the company’s own projections, by the time production starts to ramp.

That means QuantumScape will have to go back to the markets. The company at the moment plans to raise debt financing, with the help of supply agreements with automakers. It helps that one of those automakers will be Volkswagen (OTCMKTS:VWAGY), a key QuantumScape shareholder.

It should also help that the company’s technology simply may be better. The company is developing lithium-metal batteries, which promise improvements over current lithium-ion versions. QuantumScape promises better range, faster charging, and bigger power from its products versus existing alternatives — all at lower cost.

They’re big promises. But QuantumScape has an impressive roster of backers beyond Volkwagen. Its board of directors includes renowned tech investor John Doerr and former Tesla chief technology officer JB Staubel. Clearly, they believe in the company, and their imprimatur suggests that investors should do the same.

What Goes Wrong

So what goes wrong? Possibly, anything — and then everything.

QuantumScape’s technology is unproven. The company has been around for a decade and invested over $300 million in research and development so far. But production, by the company’s own estimate, still is more than five years away.

Over that stretch, EV optimism needs to stay reasonably elevated. Given lower oil prices, adoption may not be quite as fast as bulls believe.

Competition is going to be stiff. Tesla just held its Battery Day, and is promising its own improvements. There are dozens of startups working on their own designs. General Motors (NYSE:GM) announced its Ultium batteries in March.

The worst-case scenario for Kensington Capital stock is that it eventually hits zero, if under a different name. Again, the company itself doesn’t expect to generate positive free cash flow for another eight years. If development hits a snag and/or a rival takes the lead, additional financing could dry up. Production issues wouldn’t be a surprise. A development effort of this size and length requires a lot to go right.

So the case for KCAC stock isn’t that it’s likely to be worth $30 billion or more in eight years. It’s that, if all goes well (or mostly well), the company might be worth $30 billion or more in eight years — or 15 years.

For EV bulls, that’s probably still a good enough bull case. It’s certainly enough to make Kensington Capital stock intriguing. But caution and position sizing are key here: it’s unwise to invest more in KCAC than an investor can afford to lose.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.