Kensington Capital (NYSE:KCAC) is one of the more intriguing growth stocks in the market right now. Even by the standards of an electric vehicle sector that has an obvious and massive opportunity, Kensington Capital stock has potentially explosive upside.
After all, Kensington Capital is merging with battery startup QuantumScape in a so-called “SPAC merger.” As a special purpose acquisition company, Kensington is providing the cash and the public listing. QuantumScape is providing the business.
That business is truly intriguing. QuantumScape believes that it has found the key to better, longer-lasting, and cheaper batteries for electric vehicles. If the company is correct, it’s not an exaggeration to believe that QuantumScape could change the future of the entire industry.
But that’s a huge ‘if’. Revolutionary battery technologies have been promised literally since the 19th century. Few have ever really panned out.
And what makes Kensington Capital stock difficult to analyze is that investors as yet haven’t been given all that much information as to how the technology works. Of course, that technology underpins the bull case for KCAC — which makes it difficult to see the stock as compelling just yet.
The Solid-State Shift
EVs today run on lithium-ion batteries. Tesla (NASDAQ:TSLA) uses lithium-ion offerings supplied by Panasonic (Panasonic’s factory in Nevada in fact is the largest lithium-ion battery factory in the world). In March, General Motors (NYSE:GM) released details on its Ultium battery platform which will back its aggressive push into EVs. Ultium batteries, too, are lithium-ion.
QuantumScape is going a different route: to solid-state batteries. As the name suggests, solid-state batteries use solid electrolytes, instead of the liquids used in Li-ion models. In theory, that distinction should provide multiple advantages.
The liquid in lithium-ion batteries can catch fire: readers might remember the failures on the Samsung Galaxy Note 7 which led to that device even being banned from airplanes. For electric vehicles, whose batteries are far longer and which can sustain tremendous force in an accident, the risk of fire remains elevated.
Solid-state batteries also promise more energy density, which means both better power, and longer range.
Indeed, QuantumScape itself has made precisely those claims. In the presentation released along with the merger announcement, QuantumScape projected “fast charges” to 80% power in just 15 minutes. It saw bigger power, along with range expansion from a current 123 miles to nearly twice as much.
That combination of improvements can move EVs to far closer parity to ICE (internal combustion) engines. In other words, QuantumScape alone can help accelerate the shift to EVs.
How is QuantumScape Doing This?
Of course, the key question is how QuantumScape is creating those improvements. The technology isn’t yet proven: the company itself doesn’t see manufacturers testing samples until 2022.
The fact that the technology is unproven isn’t a death knell to the case for Kensington Capital stock. The fact that we don’t know what the technology actually is, however, is more problematic.
And there simply hasn’t been all that much in the way of disclosure so far. Neither the merger presentation nor the conference call offered anything in the way of specifics.
The lack of specifics leads to skepticism. A well-written article at online publication Marker highlighted questions about a material known as LLZO, which appears to be a key part of QuantumScape’s process. LLZO has offered promise in so-called lithium-metal solid-state batteries — but also has presented challenges that other companies and researchers so far have been unable to solve.
QuantumScape presumably has solved at least some of those challenges. But even experts don’t understand how. That in turn makes it very difficult for investors to understand how the company, as promised, plans to be in production within just a few years.
The Issue for Kensington Capital Stock
The fact that QuantumScape hasn’t disclosed its progress is understandable.
The company remains in a competitive race to build better batteries. The merger hasn’t closed yet. And QuantumScape chief executive officer Jagdeep Singh told Marker that more details would be coming in the fourth quarter as part of an event for Wall Street analysts.
But we’ve heard promises like this before. As Marker noted, just in the last decade startups Envia and Sakti3 have significantly inflated their accomplishments.
QuantumScape itself has talked up its “validation” from Volkswagen (OTCMKTS:VWAGY). The German auto giant has invested in QuantumScape and plans to produce its solid-state batteries. But that company also seemed to hedge its bets when asked by Marker about the validation claim.
This is not to suggest — at all — that QuantumScape is a scam, or anything close. But one of the criticisms of the SPAC process is that it results in less disclosure for investors versus the traditional initial public offering route. Kensington Capital stock at the moment is a perfect example of that problem.
KCAC Soared After Merger Was Announced
It’s not hard to wonder whether the lack of disclosure is reflected in the trading in KCAC stock. KCAC soared after the merger was announced. It then steadily declined for weeks. On Friday, the stock soared again. KCAC gained 36% when Kensington Capital scheduled its shareholder vote for Nov. 25.
That’s a rally that makes little sense. The vote was all but certain; the announcement of a specific date doesn’t seem to change the story much.
And that story is highly uncertain. Increasingly, it seems like those who don’t quite understand that fact are buying, and those that do are taking their time.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.