QuantumScape Stock Offers a Great Risk-Return Trade-Off

QuantumScape (NYSE:QS) stock is a leader in the nascent next-generation solid-state battery sector. If these batteries can deliver on their mind-boggling performance benefits, they can transform the electric vehicle (EV) battery sector. Despite the emergence of new competitors, QuantumScape remains the leader of the pack in its niche. Moreover, with it consistently nailing its goals, QS stock is an incredible long-term EV bet.

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

QS stock has been on a negative run for the past several months. Its 9-month returns have come in at a negative 62%.

The concerns over the rising competition in its sector and the negative sentiment about EV stocks have weighed down the stock. Hence, investors appear to be losing their patience with QuantumScape.

Investors are short-sighted with QS stock and appear to be writing off its long-term potential. However, what it’s done is that the stock is at a much more attractive valuation than in the past. It is now trading at just 10.69 times its forward book value.

The Fluence Deal

QuantumScape recently announced its partnership with Fluence Energy to integrate its technology into Fluence’s energy-storage products. This is a fascinating deal, as it shows the utility of QuantumScape’s batteries beyond the EV space. Moreover, research suggests that the global energy storage market will grow over 20 times by 2030.

Consequently, the preference for clean energy will increase over time, and QuantumScape’s higher density batteries may play a major role as we advance. Additionally, the deal will benefit it in speeding up its battery storage R&D timeline

Perhaps the biggest thing to come out of its collaboration is developing a strategic relationship with Fluence. As we advance, it is imperative for QuantumScape to partner with multiple companies to deliver on its long-term objectives.

Hence, it will have to develop strong relationships with original equipment manufacturer (OEMs), logistics companies, and other companies to ensure its success. Moreover, strategic collaborations are likely to bump its stock price. The synergistic gains with Fluence and other companies is priceless.

Solid-State Is The Future

The traditional lithium-ion batteries are holding back EVs from widespread popularity. EV batteries are lacking in terms of range, safety, and charging times. This is where solid-state batteries can flip the script. These batteries can charge faster, hold more density, and are lightweight. Moreover, they are also less combustible than lithium-ion batteries.

QuantumScape is currently at the top of the heap in commercializing solid-state batteries. Though the competition is heating up, QuantumScape’s focus on single, four-layer, and ten-layer batteries gives it the edge over its peers.

Moreover, it has invested over $500 million in the battery development process thus far. It will be entering the commercialization stage within the next two-to to three years and could generate meaningful revenue by 2026.

Furthermore, the company stands out with its incredible financial flexibility. It boasts an astonishing liquidity position that will remain solvent and spend on its development efforts without interruption. Its year-end liquidity stood at over $1.3 billion, which is a remarkable feat considering its free cash flow burn rate of over $250 million. The company is currently debt-free and has met all its goals for 2021 ahead of schedule.

Bottom Line 

QuantumScape may appear to be a speculative investment as the enterprise commands a valuation of over $10 billion and no revenues. However, the long-term case for the company is highly attractive, as it offers a promising risk-reward trade-off.

The company has the chops to become a juggernaut in the EV battery space, with its strong liquidity, superior product offerings, and able management. Though the competition may pose an issue, its superior product will be dominant in the sector.

On the date of publication, Muslim Farooque 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

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.  


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