Shares of solid-state battery maker QuantumScape (NYSE:QS) grew by a mammoth 259% in 2020. However, so far this year, QS stock is down roughly 58%. It appears investors are now taking note of the commercialization and development hurdles associated with the technology along with its weaknesses. Despite the drop in price, though, QS stock is grossly overvalued without any fundamentals to back it up. Investors could invest in the stock down the road, but currently, it is nothing more than a speculative play at best.
QS stock’s valuation is insane, with a market capitalization of over $17 billion. To put things in perspective, its market cap exceeded automotive giants such as General Motors (NYSE:GM) and Ford (NYSE:F). The stock has pulled back considerably this month, but it’s still incredibly high for a company in the pre-revenue stage. QS stock’s forward price to book value exceeds the industry average by over 400%. Analysts point towards a mean price target of $28, roughly $19.60 lower than its current price.
Those wanting to invest in the company could sell their shares and invest in its warrants. The warrants are priced at least 50% lower than the stock, explaining why the recent drop in value. However, what’s best is simply waiting for a better time to invest in the stock, especially when it has something concrete in the future.
Commercialization Hurdles and Overstated Claims
QuantumScape recently released performance data on its solid-state lithium-metal battery technology, which it claims improves safety, battery life, and charging time. How these batteries stack up in the real world is the real question and is currently unproven. It is tough to buy the company’s narrative in such a situation.
Ex-Tesla engineer Gene Berdichevsky talked about the problems with solid-state batteries and the long-term effectiveness of lithium-ion batteries. He believes that they are likely to be significantly more expensive than lithium-ion batteries and might not withstand the aggressive automotive environment. There is also the element of dendrite formation and micro-cracking, which are likely to impact its performance. Moreover, once an appropriate cell size is made, they might lack in safety as well.
Commercialization is another aspect that is extremely challenging for QuantumScape. The company is planning to hit the market within the next four to five years. The first three years will likely comprise developing production facilities and supply chains. The next issue is the stacking of cells, which is extremely important in ensuring safety, density, and effective cycling. The other aspect to consider is scaling the production of core components. So far, there is not much information out there, which suggests that the company has a grip on these problems. Therefore, the projected commercialization within the next four to five years doesn’t seem reassuring.
How Far is Profitability?
Naturally, what concerns investors the most about the company is when it will start generating sales and turn a profit. It is targeting commercial production in 2024 and expects to develop its 1-gigawatt hour (GWh) pilot facility with Volkswagen this year. Soon after, it will expand to a 20-GWh facility.
The company expects to make modest gross profits in the first and second years of commercial operation. Shortly, after that the management expects things to ramp up significantly. They foresee revenues of $275 million in revenue and $73 million in gross profit by 2026. In 2027, it expects revenues and gross profit to take off handsomely to $3.2 billion and $1 billion, respectively. It is also the year where it generates positive EBITDA at roughly $808 million. At this point, though, all these claims can be deemed as mere conjecture. QuantumScape has a lot to prove before investors could think about taking these numbers seriously.
Bottomline on QS Stock
Given the available information, it doesn’t seem like QuantumScape would succeed in getting a battery to market. Experts are skeptical about solid-state batteries’ potential and appear that the management’s claims are largely overstated. Even if it does manage to be somewhat successful in its plans, meaningful revenues and profitability are still years away. Therefore, it’s best to avoid QS stock 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