QuantumScape Stock Is a Little Less Risky Now, But Don’t Go All In

Development stage electric vehicle (EV) battery manufacturer QuantumScape (NYSE:QS) stock continued to experience double-digit price declines in a January market sell-off.

A sign for QuantumScape (QS).
Source: Michael Vi / Shutterstock.com

Even as the company announced a new business relationship that expands its total addressable market and de-risks its investment profile to some extent, the stock struggles.

Although QS stock has plunged by nearly 70% over the past year it remains a promising EV battery play.

However, QuantumScape’s focus is no longer on the EV battery market alone. The company has branched into a much larger and fast-growing energy storage market.

QuantumScape and Energy Storage

In a new collaboration deal announced on Jan. 13, QuantumScape and established stationary energy storage manufacturer Fluence Energy (NASDAQ:FLNC) agreed to incorporate QuantumScape’s technology into Fluence’s storage products.

Fluence Energy went public last year. It generated over $680 million in revenue last year (FLNC’s fiscal year ends in September).

Wall Street projects the company could see revenue grow by 78% to $1.2 billion in fiscal 2022 before hitting the $1.7 billion mark next year – another strong 44% annual sales growth.

If successful, the deal could establish a new customer for QuantumScape’s solid-state lithium battery technology in a fast-growing stationary energy storage market. T

his could be a significant start in QS stock’s penetration of a multibillion market that could prove larger than the original EV battery market target.

New Opportunities for QS Stock

Although the global EV battery market is experiencing fast growth, the stationary energy storage market could trounce its numbers this decade.

A recent Fortune Business Insights report predicts that the global electric vehicle battery market could grow from about $27.3 billion in 2021 to more than $154.90 billion by 2028.

The numbers indicate a potential compound annual growth rate (CAGR) of 28.1% per annum during the forecast period.

On the other hand, well-informed market analysts expect stationary energy storage installations to grow by more than 2,000% from 2020 to 2030, representing a potential $385 billion global market opportunity.

In other words, QuantumScape has decided to branch into a much larger market and has more than doubled its total addressable market by making this latest move.

The latest collaboration deal with Fluence Energy opens up new growth opportunities beyond the “small” EV battery market into a larger and grander addressable market

QS Stock De-risked?

QuantumScape stock remains a high-risk play, though with the solid backing of giant carmaker VW and two other unidentified parties in recent partnerships in the EV battery vertical.

Until now, QS stock was regarded as a pure-play electric-vehicle battery play. This confined its valuation to just one market’s dynamics, risks and opportunities. All eggs were in just one basket, if I may say.

However, the latest deal in the stationary battery storage applications space changes the company’s profile in some significant way.

If market development in the EV space slows, QuantumScape can still adapt its technology to a bigger alternative market, and lean on an experienced industry player in executing a scalable business model.

The Fluence deal reserves batteries produced at QS’s pre-pilot production facility as the companies work to integrate their two technologies.

There isn’t much to celebrate for QS stock investors yet. The company is yet to decide, in consultations with Volkswagen, where to install its first large-scale production facility. The business is yet to post any revenue.

Whether the business will ever be sustainably profitable and generate positive cash flows remains anyone’s guess.

Investor Takeaway

The increasing number of partnerships and collaboration agreements in QuantumScape’s contracts portfolio can only mean one thing: the market sees potential in the company’s proprietary technology.

Investors in QS stock have two market verticals to watch going forward, and that gives promise to a potentially larger business footprint for the emerging EV battery maker as it revolutionizes the energy storage market.

That said, QS stock remains a high-risk investment as the business is yet to be proven profitable and sustainable. We wait to see if its new battery technology can be deployed at a large scale and if happy first customers will come back for repeat purchases.

It would be prudent for investors to restrict allocations to QS stock to small positions that won’t hurt portfolios if volatility worsens on speculative investment.

On the date of publication, Brian Paradza did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Brian Paradza is an investing enthusiast who was awarded the CFA Charter in 2019. A strong believer in fundamentals-based long-term investing, Brian learns from gurus like Warren Buffett but acknowledges human behavioral tendencies that drive short-term “madness”. You may find him inquisitive as he examines tech investing opportunities, cannabis, blockchains, and the new cryptocurrencies asset class.


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