Quantumscape (NYSE:QS) is another company opting for the SPAC (special purpose acquisition company) route in listing on the stock exchange. The electric vehicle battery producer has its sight set on a lithium battery design that could revolutionize the industry. It has attracted a lot of attention since its inception with investments from several high-caliber individuals and companies. Some of these investors include famed venture capitalists such as Kleiner Perkins and legendary cyber-tycoon Bill Gates. However, meaningful revenues are still way-off, and information insufficiency makes Quantumscape stock a highly risky bet at this stage.
Quantumscape merged with SPAC Kensington Capital Acquisition and started trading on the NYSE in late November. Quantumscape was valued at $3,688 million and an additional $471 million in cash. Its original owners own roughly 82.4% of the company, while Kensington and private investors took 23 million and 50 million shares, respectively. One of the more notable private investors was Volkswagen (OTCMKTS:VWAGY), which invested $100 million in the company. The company’s initial enterprise value was $3.3 billion but has now exceeded the $20 billion mark.
The Positives
Quantumscape’s EV battery design has piqued its investors’ interest, especially after the tall claims made by its management. They claim that the batteries can store over 80% more energy than its existing competition. The battery produced by the company comes with a ceramic separator, which allows for easy access of the lithium to the anode. There is no graphite layer involved, which means that the lithium deposits go directly to the battery’s anodes.
Quantumscape claims that these batteries will be cost-effective, have faster charging, and have a longer life than existing lithium-ion batteries. Additionally, it will have significantly higher energy density and will be safer than current EV batteries.
Furthermore, the company currently has no debt burden, and its current cash balance is enough to sustain its operations until commercial production in 2027. Therefore, with sufficient liquidity, it can focus on turning its dream into reality.
Moreover, its relationship with Volkswagen gives it a great head start. Volkswagen is aggressively pursuing its EV goals looking to sell over 22 million EVs by 2029. Volkswagen is the first major customer for Quantumscape and one which will help it successfully commercialize its products.
The Negatives
Naturally, such an ambitious project cannot come without some significant risks. The most obvious one is that the company will not generate any meaningful revenues for a long time. Hence its stock appreciation will depend on its development progress rather than the usual financial metrics. The company will have little margin for error in this situation and would have to meet its targets effectively. It would be great, though, if we had more information about its plans, which would have been available in a traditional IPO.
Furthermore, the company’s lithium cell has only been tested in a single layer configuration. A multi-cell battery will take years to develop and includes several dimensions from pilot testing to completing the full-scale plant. Quantumscape states that it will take roughly seven years before its factory could generate positive free cash flow. Additionally, several bigwigs of the automotive world are pouring money into the on-going research to develop the best EV batteries.
Another problem with the company is its overblown price. According to mean analyst estimates, the stock is trading at overvalued by approximately 56.4%. Moreover, its warrants are trading at roughly 3.5 times lower than its stock price. Therefore, it would be more prudent to invest in its warrants based on simple arithmetic.
Final Word on Quantumscape Stock
The company’s product promises disruption in an industry which is on fire at this time. And However, revenues are is still several years away and it needs to hit its projected milestones to keep investors interested. The lack of information doesn’t help either and the intense competition in the industry will keep it on its heels. On top of that, the stock is extremely overvalued making its warrants more attractive at this time. Hence it’s more of a speculative investment at this stage and making it tough to go long on it at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article
