Electric vehicle (EV) stocks generally have been huge winners in 2020, but Kensington Capital (NYSE:KCAC) has been a bit of an exception. Kensington Capital stock soared in early September after announcing its merger with QuantumScape, but has since pulled back some 25% from its highs.
It’s a dip that investors, and EV bulls in particular, should consider buying. Electric vehicle adoption is going to accelerate (pardon the pun). But for that to happen, batteries need to improve.
That said, QuantumScape should be one of the companies leading those improvements. The merger with Kensington Capital, a SPAC (special purpose acquisition company), brings the battery supplier to the public markets while also raising a significant amount of capital to fund expansion.
With that capital in hand, and with the merger likely to close in the coming months, Kensington Capital stock looks enormously attractive. As always, investors need to be aware of the risks. But the potential rewards in KCAC stock are as big as those of any stock in the space.
QuantumScape is developing solid-state lithium-metal batteries for electric vehicles. If successful, the technology could be revolutionary.
Existing lithium-ion batteries are good — but not great yet. And a core problem is that they’re generally not getting better. As Kensington Capital noted in its merger presentation, lithium-ion batteries have “reached their physical limit.” Energy density simply can’t increase much more, if at all.
For now, lithium-ion batteries can be good enough. But to develop low-cost EVs, as well as pickups, delivery vehicles and even semis, more energy is needed. That’s where QuantumScape aims to come in.
It’s developing a solid-state lithium-metal battery. And if successful, those batteries could represent a huge leap forward.
Costs would come down, since lithium-ion batteries require more materials with anodes as well as higher manufacturing costs. Charging is faster: QuantumScape believes its batteries can get to an 80% charge in less than 15 minutes. Battery life is longer. And as opposed to lithium-ion batteries which use liquids, solid-state batteries are not flammable.
Moreover, it’s worth emphasizing: the technology isn’t proven yet. But QuantumScape has a good shot at getting to that point. An impressive board of directors includes well-known tech executives, venture capitalists, and EV veterans. The company already has spent over $300 million on research and development. The $1 billion-plus raised in the merger (along with a private placement) should fund the company to production.
Thus, there’s a clear path to success here.
Big Potential Upside in Kensington Capital Stock
Overall, if QuantumScape follows that path, the rewards in what is now Kensington Capital stock — and soon will be QuantumScape stock — could be enormous.
In that merger presentation, Kensington and QuantumScape laid out their targets for 2028. The companies expect the sale of 910,000 batteries will lead to revenue of $6.4 billion. EBITDA (earnings before interest, taxes, depreciation and amortization) should clear $1.6 billion, for a healthy 25% margin. And free cash flow at that level of EBITDA would come in around $560 million.
If that scenario played out, QuantumScape likely would be a company worth at least $28 billion, even using conservative 20x EBITDA and 50x free cash flow multiples. Pro forma for the merger, Kensington Capital stock has a market capitalization just over $6 billion.
In other words, if QuantumScape can deliver on its potential, investors in KCAC stock now will at least quadruple their money in about eight years. And if the company outperforms, or multiples are higher (which wouldn’t be a surprise given the company would still have substantial growth ahead), the returns could be even greater.
Mind the Risks
Let’s be clear. Those rewards are not guaranteed. 2028 targets are just that: targets. Advancements in battery technology have been promised since the 19th century. Quite often, they turned out to be disappointments.
Competition will be stiff, as a number of startups are developing their own technologies. Major automakers have entered the market as well. And QuantumScape to some degree will be at the mercy of its customers: no matter how good the battery is, it may not be good enough to generate sales if the vehicle itself isn’t attractive enough.
Also, QuantumScape’s technology remains mostly theoretical. The company has made progress, but it will take years to prove the viability of its products.
Collectively, despite a decade-long history, QuantumScape is still a startup. And investing in startups is a risky endeavor.
But, whether in public or private markets, investors are willing to make those investments because the rewards can be enormous. The same is true of Kensington Capital. The EV revolution is going to need a better battery. And if QuantumScape can deliver that better battery, Kensington Capital stock at $14 will look in retrospect like an absolute steal.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.