Quantumscape Is Gaining Value as Its Solid State Batteries Pass Muster

Quantumscape (NYSE:QS) stock now looks more valuable as a result of a third-party test of its batteries. The results showed its lithium-metal electric vehicle (EV) batteries basically performed up to their own previous expectations and internal tests. Subsequently, QS stock spiked starting on Oct. 27 and now stands at $34.57  as of midday Nov. 10.

The entrance to QuantumScape Headquarters QS stock

Source: Tada Images / Shutterstock.com

This couldn’t have come at a better time for QS stock. As I indicated in my last article, the stock was languishing without any good news. Significant revenue was potentially years off, as the company has yet to go into commercial production of solid-state batteries.

And now, there is more good news. The company’s Oct. 27 earnings report and shareholder letter indicated a new original equipment manufacturer (OEM) might be interested in using their solid-state batteries.

What This Means For Quantumscape

The announcement was made on Sept. 21, but the shareholder letter indicated that, in addition to Volkswagen (OTCMKTS:VWAGY), this second global automotive company had already tested their solid-state batteries in their labs.

The agreement now calls for the OEM to include Quantumscape’s batteries in pre-series prototype vehicles and, ultimately, series production vehicles. The company says this move will have major commercial implications.

In fact, the OEM had already purchased 10 MW (megawatts) of batteries from Quantumscape. Here is what the shareholder letter said it means:

While the potential near-term economic value of these pre-pilot test cells is in the high single-digit millions, if we are able to deliver on the technical milestones, we believe this deal will be a major long-term opportunity.

In other words, this increases the value of the company significantly. The shareholder letter says two of the top 10 automotive OEMS are now “prospective customers” for their solid-state batteries. With this second OEM, the business model is no longer singularly tied to Volkswagen.

After all, at any point, Volkswagen could have taken advantage of the situation through its purchases of EV batteries. It could have lowered the price it was willing to pay for solid-state batteries or held off in case it developed its own alternatives. Now Quantumscape has options in its ultimate power struggle — and potential issues with having just one customer.

What This Means For QS Stock Owners

Analysts have now started upgrading their views on the stock. According to Yahoo! Finance, which uses Refinitiv data, the average price target of five sell-side analysts is $36.20 per share.

Additionally, Seeking Alpha indicates that six Wall Street analysts have a $36 average price target. This underscores the Refinitiv analyst survey data.

This means shareholders in QS stock can now begin to rest easier. The shareholder letter indicated Quantumscape now expects to incur between $130 million and $160 million in cash operating expenses for 2021. That is difficult to take when you don’t have good news.

However, it’s not as if the company is in any liquidity danger. It said that by the end of the year, it will have “greater than $1.3 billion in liquidity,” even after all this cash burn.

As a result, expect to see QS stock continue to move up, especially as it guides shareholders on any new developments with their new prospective customer.

It is still too early for me to value the stock, however. I need to be able to estimate its future cash flow with much more certainty. That can only come when either Volkswagen or the second OEM client puts in definitive solid-state battery orders.

Nevertheless, I am no longer as pessimistic about QS stock as I used to be. Clearly, Quantumscape is now starting to “show the money.”

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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