The last time I wrote about QuantumScape (NYSE:QS), a developer of solid-state batteries for electric vehicles, was in May 2022. At the time, QS stock traded at $15. It’s now less than half that.
My article discussed how nickel could become less important to produce these batteries. Interestingly, the metal could be replaced by iron, whose prices have remained far more stable than lithium and nickel over the past few years, not to mention much cheaper.
“The latest price for nickel is $31,722 per ton, while a ton of iron ore is $142. Now, you don’t have to be a rocket scientist to understand that if the battery could be more energy efficient while cheaper to produce, that’s a win/win solution for QuantumScape,” I wrote at the time.
Given QuantumScape’s rising costs then, I thought it could be an absolute game-changer. That was then, but this is now.
As InvestorPlace contributor Rich Duprey recently said, “If it loses its primary backer, the potential for QS stock is over.”
I’ve read nothing beyond 2022 about QuantumScape’s use of iron instead of nickel, so I’ll assume its management chose not to chase after the cheaper alternative.
Only big risk-takers ought to consider QuantumScape stock. Here’s why.
How About Those Costs?
QuantumScape’s 2022 10-K shows that in the last three fiscal years, its operating losses have accelerated from $81.0 million in 2020 to $215.3 million in 2021 and $420.6 million in 2022. That’s $717 million in losses over three years.
Through the first nine months of 2023, they were $354.4 million, so it looks like they’ll be around $472 million for 2023, only slightly higher than a year ago.
So, it has slowed the losses, but they remain a significant concern given the timeline for commercializing its batteries seems further away every day. Duprey noted analysts believe meaningful revenues won’t be had until 2027, with positive cash flow generation several years later.
QuantumScape spent an average of 73.8% of its operating expenses on research and development over the past three years. That means it spent an average of 26.2% on general and administrative costs. In the nine months of 2023, it spent 71% of its operating expenses on R&D and 29% on G&A.
It doesn’t appear to have aggressively cut its operating expenses.
No wonder Volkswagen (OTCMKTS:VWAGY) is looking for other battery options. VW has trimmed its fat far more than QuantumScape in the past year. Further, it announced in December that the company and worker representatives worked out a plan to cut $11 billion in annual costs by 2026.
If QuantumScape isn’t careful, it will be a part of that cost-cutting drive.
Why Not Buy BYD Instead?
Realistically, unless you’re in the business of venture capital investing, it’s hard to understand why anyone other than the most seasoned risk-taker would place a bet on QuantumScape right now.
I always like to discuss the idea of having options when investing. That’s the beauty of it. You don’t have to buy the first stock that comes along. You don’t have to buy the sexy, shiny, exciting, mysterious pre-revenue stock.
For example, if batteries are your focus, why not consider putting a bet down on BYD (OTCMKTS:BYDDY), the Chinese automotive company. It recently passed Tesla (NASDAQ:TSLA) as the world’s top seller of EVs, producing 3.02 million new energy vehicles in 2023, considerably more than Elon’s Musk’s 1.84 million.
Of course, there’s a catch. BYD’s number includes 1.4 million hybrids. Excluding those, Tesla led BYD by 240,000 battery-electric vehicles. However, BYD is coming on strong.
In early January, the company broke ground on constructing its new sodium-ion battery plant in Xuzhou, China. Investing $1.4 billion to build the plant, it will have a projected capacity of 30 gigawatt-hours.
Before you get too excited, the type of batteries that will be produced at the BYD plant are for small EVs and scooters, not larger SUV EVs.
The point, however, is that it’s making plenty of battery investments without losing its shirt. Buy BYD until QuantumScape turns a corner. The risk/reward proposition is so much better.
I would not buy it now if you don’t own QS stock. If you own it, I would think long and hard about why you own it and whether it’s worth it. For this reason, I’d rate QS a Sell.
On the date of publication, Will Ashworth 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.
