Two of the year’s hottest trends are special purpose acquisition companies (SPACs) and electric vehicles (EVs). Combine the two, and you’re bound to have a real winner on your hands. That’s been the case for QuantumScape (NASDAQ:QS), at least so far. QuantumScape stock has been one of the top performers on the Nasdaq over the past month as many buyers purchased the shares in the wake of QuantumScape’s recent merger with Kensington Capital.
QuantumScape aims to commercialize solid-state batteries that would greatly lower the cost of powering up EVs. This has been a pain point for EV manufacturers and EV buyers, as internal combustion engines are cheaper and faster to fuel for the time being. If QuantumScape can change that part of the equation, it should make a fortune in the coming years.
However, traders have stopped worrying about the long-term, as they’ve already bid QuantumScape stock up to the stars as though its product is ready and it’s about to start generating huge revenues tomorrow.
The Kensington Capital SPAC, which merged with QuantumScape, started trading at $10. After the merger closed recently, QuantumScape has gone parabolic, recently hitting $76 at its peak. As you’ll see, this valuation is absurd and unjustified.
Minimal Operating Business
SPACs don’t go through the same rigorous vetting process as traditional IPOs. Less disclosure is required, and investment banks don’t double-check all of the companies’ assumptions. Additionally, SPACs, unlike IPOs, get to release upbeat presentations estimating their financial results years into the future.
For QuantumScape in particular, its forward outlook is fascinating. In its own presentation, QuantumScape acknowledges that it will be validating and testing its batteries through 2023. And the company acknowledges that its smaller 1 gigawatt-hour factory won’t be finished until 2024.
Assuming everything is working as planned up to that point, it will expand to 20 gigawatt hours, but that project won’t be completed until 2026.
And remember that a great deal could go wrong along the way. There could be product setbacks, losses of key partners, and competitors who develop better batteries than QuantumScape, along with other adverse events for the company. Six years is an eternity in the fast-moving EV space.
Waiting Until 2027 for Profits
According to its own road map in its investor presentation, QuantumScape doesn’t anticipate large revenues in 2026. It predicts that its sales in 2026 will be $275 million, but the company expects its sales to surge to $3.2 billion in 2027 following the launch of its much larger factory.
Furthermore, QuantumScape projects that its EBITDA will come close to breakeven in 2026, followed by $800 million of positive EBITDA in 2027. It doesn’t expect to generate positive free cash flow until 2028.
Long story short, you’re going to need to be patient for the better part of the next decade before QuantumScape starts making serious money. And that’s assuming that there will be no delays, setbacks, or business pivots along the way.
The icing on the cake comes from another slide in QuantumScape’s investor presentation. In it, the firm estimates that it will be worth $45 billion in 2028, assuming that the market values it at seven times its revenue.
That would work out to a share price of about $100 or so for QuantumScape stock, assuming it does not issue additional shares. However, it will almost certainly have to do so, since it doesn’t envision having positive cash flow until 2028. Consequently, it will have to fund its investments and operating losses by selling more stock.
So, based on the company’s own outlook, I believe its shares might be worth only a bit more in seven years than today. And that’s if everything goes according to its plan. If there are any issues with its batteries, the shares would get decimated.
The Verdict on QuantumScape Stock
I have no complaints about QuantumScape’s business concept. In fact, in an article published back in September, I was quite positive about its long-term potential, writing: “As far as the rush of electric vehicle SPACs goes, I’d rate this one pretty highly compared to much of the competition. This company has great backers, a clear product vision and the potential to be a huge business if the technology works.”
So make no mistake, QuantumScape is a worthwhile concept. However, its current valuation is utterly crazy. There’s simply no way to make the math work.
Even if the company grows in-line with its estimates, the shares are unlikely to climb very much. They simply don’t offer enough reward to justify the risk they pose. And meanwhile, if QuantumScape’s battery technology runs into any issues, its shares can tumble tremendously.
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 InvestorPlace.com 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.