QuantumScape Is a Risky and Unproven Bet

  • QuantumScape (QS) stock gained 10.1% on Tuesday last week following a news about its partnership with Porche.
  • Another two-three years are still expected for this plan to materialize. The company is yet to commercialize its product and generate revenues.
  • As significant execution risk lingers, QS appears to be a risky bet.
The entrance to QuantumScape Headquarters QS stock
Source: Tada Images / Shutterstock.com

QuantumScape (NYSE:QS) stock has been taking a beating on Wall Street as investors continue to be unimpressed by the progress made so far. The company has invented breakthrough battery technology that has the potential to change the landscape of the electric vehicle (EV) industry. Yet, the company’s stock is down 10% year-to-date and down 62.1% from its 52-weeks high.

Most recently, a German monthly business magazine, Manager Magazin, published the company’s partnership with Porsche. The company is expected to be supplying its solid-state batteries for electric version of Porsche’s 911 sports car. However, no official statement has yet been released from both the parties. QS did mention in its earnings report to be in alliance with three EV makers but did not name them.

As Porsche is a part of Volkswagen (OTC:VWAGY), the supplier agreement should not come as a surprise.

The long-term prospects look appealing if QS is able to successfully commercialize its product.

However, from a short-to-medium terms perspective, investment in QS appears unattractive. There is a huge execution risk prevails and no visibility with respect to shareholder value creation before 2025.

QS QuantumScape Corporation $20.16

Designing and Commercialization Bottlenecks

At present, the batteries used in an electric vehicle are heavier, takes longer time to charge (40 mins to 1 hour) and provides lesser mileage of approximately 250-300 kilometers or about 170 miles. Quantamscape’s solid-state lithium batteries aim to recharge within 15 minutes and provide better driving range that is otherwise difficult to get in traditional lithium-ion batteries.

In January 2022, management indicated that the initial test results of these batteries have been encouraging. The company’s batteries could be charged from 10% to 80% for the first 400 cycles within 15 minutes. Further, these batteries could retain capacity well over 80% after 400 and 800 cycles.

For 2022, management aims to finalize its cell format, deliver cells with multiple layers, and manufacture pre-pilot test samples. First production is likely to commence in 2023. If everything goes fine, QS should commercialize the product by 2024-2025.

This would mean, QS will not generate any revenues or income for another three-years. The company has already taken 12 years to design solid-state batteries, so a considerable time has already been invested. Still, significant execution risk remains, regarding proving its technology, production, and commercialization.

In the fourth quarter 2021 letter to shareholders, management indicated one of the bottlenecks QS is facing to scale up production is equipment availability. If this problem persists, it might have to face difficulties in during its pre-pilot production phase.

Uncertainty Would Compress QS Stock Valuation

In Q4 2021, the company delivered net loss of 16 cents, 10 cents worse than Street expectations, as per data provided by CNN business.

The company ended the year with $1.44 billion in cash and cash equivalents. It intends to spend between $325 million and $375 million in capital investment during 2022 with higher capital expenditure (capex) expected in 2023 and 2024.

Given the company’s relationship with EV giant Volkswagen, and China-based SAIC Motors, and Microsoft (NASDAQ:MSFT), it should have not face difficulty accessing capital to carry out its growth plans.

However, as the company is yet to prove its capability and generate any revenues, it might find it difficult to secure loan at a favorable rate, especially in the given rising interest rate environment.

Should You Buy QS Stock?

In January 2022, QS entered into a strategic partnership with Fluence, a stationary energy storage provider, to test and validate the company’s solid-state batteries for using it in its proprietary energy storage solutions. If the company is successful in its testing phase with Fluence, it will generate huge returns for its shareholders.

Quantumscape’s technology is superior if it works as expected. However, as the company is still at a nascent stage and needs to prove its capabilities, lot of uncertainties prevail, making it a risky proposition at current levels.

Investment in this stock can be considered only from a longer-term perspective by a risk aggressive investor. So most investors should sit this one out, for now at least.

On the date of publication, Sakshi Agarwalla 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. 

Sakshi Agarwalla has more than eight years of experience writing equity research reports and preparing financial models for companies across various industries, as well as writing newsletters and financial articles. Recently, she assisted her Fund manager in executing trades, preparing weekly, monthly NAVs and writing newsletters. She has a postgraduate degree in finance and has completed CFA.


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