After Its Quantum Leap, It’s Time for Another Look at Kensington Capital

Kensington Capital (NYSE:KCAC) stock is fully-charged right now. In fact, it positively jolted the skeptics, as KCAC stock soared 36% in a single trading session last Friday. Admittedly we’ve seen some profit-taking since then. Regardless, Kensington Capital clearly is back on traders’ radars.

The headquarters of QuantumScape (Kensington Capital) in San Jose, California.

Source: Tada Images /

This is in part because of the broader excitement in the green energy space.

Joe Biden’s win in the recent presidential election sets the stage for a change of course in the federal government’s energy policy going forward.

While it’s unclear what exactly will be different as it relates to vehicles in particular, its probably going to be a positive for the sector. That, in turn, will be good for battery-makers such as QuantumScape, which Kensington will be merging with over the next few weeks.

Kensington Capital and QuantumScape

Most companies seek to incrementally improve a product. Make something a little faster, a little lighter, or a bit more efficient. As long as you can get a patent and specifications a touch ahead of the competition, you generally have a viable product and business model.

QuantumScape is not doing that. Rather, it seeks to reboot the electric vehicle (EV) industry from the ground up. Its aim is huge; it wants to replace lithium-ion batteries with solid-state ones.

Lithium-ion batteries are still lacking in capacity, are prone to overheating and catching fire, and have been a sticking point for adoption of EVs and other energy-intensive applications. QuantumScape’s solid-state batteries, if they are as successful as hoped, would be safer, charge faster, and have higher capacity than existing models.

This would be great business for QuantumScape just on its own. But its get even better when you consider the second-order effects. EVs have still struggled to gain wider adoption, in large part, because batteries are expensive and cumbersome compared to internal combustion vehicles.

If QuantumScape can neutralize this big weakness of EVs, it would make the overall market much larger, allowing QuantumScape to grab a big piece of a rapidly-expanding pie.

But Will It Work?

All this sounds great in theory. But it’s not yet clear that QuantumScape has solved the puzzle around how to produce these better batteries yet. For potential investors, page 42 of the company’s recent prospectus offers a sobering look at all the technological challenges the company must still deal with before it reaches commercial production. Here’s a small excerpt:

“QuantumScape has not yet built a multi-layer solid-state battery cell in the dimensions required for automotive applications. There are significant developmental and mechanical challenges that QuantumScape must overcome to build its multi-layer battery cell for automotive application.

In addition, QuantumScape will need to acquire certain tools that it currently does not possess and develop the manufacturing process necessary to make these multi-layer battery cells in high volume. If QuantumScape is not able to overcome these developmental hurdles in building its multi-layer cells, QuantumScape’s business is likely to fail.”

After going on about further hurdles it will face along the developmental path, QuantumScape concludes by noting that even if it designs a successful solid-state battery, it might not be at a price point capable of achieving commercial success.

This should show just how much risk early-stage investors are taking in backing the firm. It’s great the QuantumScape is doing all this research. If they succeed, it would be huge both for investors and the betterment of the planet as a whole.

However, this is really early along in development. Normally, companies don’t go public until they have a proven product and substantial revenues. Investing in this stock now, by contrast, is closer to a pure venture capital sort of play.

KCAC Stock Verdict

Putting aside the development process for a minute, Kensington Capital stock’s recent run was pretty weird. Shares surged 36% in one day simply on news that the merger with QuantumScape is heading toward shareholder approval.

However, there was never really much doubt that Kensington’s shareholders would approve the proposed QuantumScape merger. QuantumScape looks like a great merger target, as it’s at the intersection of several hot trends right now. A Kensington Capital investor could hardly be more pleased with this deal.

So in light of that, the 36% one-day surge in KCAC stock doesn’t make a lot of rational sense. That said, a trendy company like this sometimes just needs a reason to get buying interest going. This news, even though it wasn’t surprising, was enough to get the momentum flowing.

Just beware of your risk management in a trade like this. When a stock runs up for no particular fundamental reason, as Kensington Capital did last week, it can be prone to sudden reversals of fortune.

As QuantumScape is years away from delivering a significant number of batteries to customers, the road ahead will be filled with ups and downs, and the ultimate success of the company depends on its future research and development efforts which may or may not pan out. As such, there’s no need to chase the rally. If you want to buy, you can probably wait for a better price.

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 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.

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