Could QuantumScape Get Acquired?

  • QuantumScape Corp. (QS) stock’s 93% plunge makes it a vulnerable acquisition target if shares fail to recover soon.
  • Its proprietary solid-state battery design requires a major capital raise for factory builds.
  • Whichever carmaker incorporates solid-state batteries in its mass-market offerings first may enjoy a significant market mover advantage.
QS stock - Could QuantumScape Get Acquired?

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Solid-state battery developer QuantumScape Corp. (NYSE:QS) was a $54 billion stock just 18 months ago, but after an agonizing 93% decline in QS stock off a peak valuation printed in January 2021, QuantumScape’s equity valuation has fallen. Two factors could render the innovator a potential hostile takeover target… but how likely is the company an acquisition candidate?

Periods of stock market declines and subdued equity valuations render some high-quality companies too cheap for both opportunistic buyers and strategic acquires to ignore. The electrical vehicle (EV) market is in rapid growth mode. Car makers are rushing to meet tightening regulatory targets in America and the European Union by 2030. They are jostling to find the most competitive components. Key suppliers — especially innovative start-up battery developers — could be easy buyout targets in a down market.

QuantumScape promises to revolutionize the EV battery market with its solid-state battery technology. Solid-state batteries promise quicker charge times, higher energy density and lower costs while eliminating fire hazards associated with current lithium-ion battery technology.

Whichever carmaker incorporates solid-state batteries in its mass-market offerings first may enjoy a significant market mover advantage. Toyota Motor (NYSE:TM) is a serious contender.

Naturally, a company’s valuation should increase as it achieves key development milestones in a huge market expected to reach $560 billion by 2030. Shares in QuantumScape have crumbled instead.

QS QuantumScape Corporation $9.16

Why did QuantumScape (QS) Stock Decline?

Investor enthusiasm lifted QS stock to feverish heights soon after its reverse merger with a special purpose acquisition company (SPAC) in November 2020. In hindsight, we can easily conclude that most EV-related stocks got extremely overvalued during the Covid-19 pandemic stay-at-home trades, which got a boost from the Fed’s stimulus.

This year, valuations have since corrected in a market sell-off as investors flee growth names with unproven track records and negative cash flows.

Once a $130 stock in 2020, QS stock traded as low as $8.77 a share on Monday. The market value of QuantumScape equity has declined from $54 billion in early 2021 to under $4 billion at the time of writing. A strategic or opportunistic investor could find QS stock far cheaper to buy for valuable intellectual property and its high probability to become an industry disruptor in the EV battery market.

Should Investors Care About Potential QS Stock Acquisition?

If QuantumScape stock gets acquired in a merger deal, current investors in QS stock may not get the chance to recover earlier capital losses. Investors may lose the opportunity to participate in the shares’ recovery as the company gets taken away from them.

That said, could a bidder acquire QuantumScape stock after its precipitous fall?

Two Key Reasons QuantumScape Could be an Acquisition Target

Two key attributes for QuantumScape could make it an interesting acquisition candidate right now. Investors should watch out for one key indicator in management commentary.

Firstly, QuantumScape is on track, thus far, towards achieving key development milestones within the next few months. The company recently successfully scaled up its battery design and tested a larger 16-layer battery without efficiency losses. A successful scale-up to a usable car battery size by the end of this year could make QuantumScape closer to commercializing its solid-state battery.

First deliveries of test units to battery development partners Volkswagen and other unidentified car manufacturers could significantly raise the company’s intrinsic and market value. Successful battery test results could significantly revalue the company’s technology higher (and ignite a strong rally in QS stock) over the next two years. An opportunistic buyer could want all that value for itself and scoop the gem away from the public market.

Secondly, we know that QuantumScape’s proprietary solid-state battery design isn’t compatible with current lithium-ion battery manufacturing factory set-ups and equipment. The company will require billions in new financing to build out and equip new battery manufacturing factories.

Although the company had more than $1.3 billion in cash, cash equivalents and marketable securities after the first quarter of 2022, the funds are enough to fund current development and testing activities, but the liquidity isn’t enough to fund the most critical stage in its execution plans – factory building.

QuantumScape may need to team up with a strategic financing partner to make its factory building plans a reality. And this could happen within the next two short years.

Therefore, it shouldn’t come as a surprise if a strategic buyer comes forward to scoop a major stake in QS and potentially take the company private.

Investor Takeaway

QuantumScape is still a heavily shorted stock. According to Stock Rover data, short interest hovers above 19% of total equity as bearish investors bet on QS stock falling further. However, a successful battery development program could unlock growing value in the company’s business.

If the market doesn’t revalue QS stock higher, in time, deep-pocketed buyers may potentially launch takeover bids as the company shops for new capital for factory building. Beware when management says it’s evaluating financing options to enhance shareholder value! One of them could be a sale to a bidder.

Given QuantumScape’s strong cash position today, a potential bidder for QS stock would fork out less than $3 billion in net cash to buy everyone else out. The risk of an acquisition happening rises as shares decline in the public market, yet the company’s battery prototypes scale-up and inch closer to successful deployment in actual consumer-driven cars.

On the date of publication, Brian Paradza did not hold (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 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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