QuantumScape’s stock price (discussed here in our previous newsletter) is probably why we are writing this article today. While not taking any views at present, it warrants to understand what a ~$50 billion company (peaked at Dec 2020) actually does and offers.
While we noticed particular interest among investors in the stock, we think it’s important for investors to have a quick refresher before deciding whether to invest in QuantumScape or the wider solid state battery technology space.
In this article, we seek to understand the solid-state battery technology space that QuantumScape (QS) operates in. Additionally, we look to dissect its business model, company projections/financials and the viability of the sector and QS going forward.
Finally, we also share our thoughts on the current valuation, pluses and minuses.
What is QuantumScape?
Founded in 2010, QuantumScape is an American company that produces solid state lithium-ion batteries for electric vehicles (EV). Its investors include Bill Gates and Volkswagen. It boast an even more impressive board including John Doerr, chairman of VC firm Kleiner Perkins, JB Straubel, Co-Founder and ex-CTO of Tesla and Vinod Khosla, Co-Founder of Sun Microsystems and Khosla Ventures.
The foundation and composition of the management team cannot get any better than this!
It has been argued that the world has no shortage of EV producers, but it’s the battery technology that is a deterrent to the mass market. QS’s existence is simply to address this very issue.
QuantumScape’s goal is produce next generation solid-state batteries, where it sees a more than exponential growth in its addressable market. To put this in context, approximately 2% of global light-vehicles are electrified, according to estimates. Given climate change awareness and the need for sustainable clean energy alternatives, we expect this number to increase rapidly.
Consequently, this also points towards an emerging growth sector that investors are only now beginning to warm up to.
The uniqueness of QS stems from its proprietary solid-state battery technology (addressed later in the article) and its affiliation to Volkswagen. Specifically, its ties with VW, one of the world’s largest car manufacturer, allows QS to build scale and efficiency through its platform.
Understanding the EV battery landscape
According to the US Department of Energy, the key types of energy storage systems that are commonly used in hybrid electric vehicles (HEVs), plug-in hybrid electric vehicles (PHEVs) and all-electric vehicles (EVs) are:
|Lithium-ion||Most of today’s PHEVs and EVs use lithium-ion batteries||High power-to-weight ratio||Safety concerns regarding overheating|
|Other usage includes most portable consumer electronics, eg: cell phones, laptops etc.||High-energy efficiency and good high temperature performance||Relatively costly|
|Nickle-metal hydride||Widely used in HEVs||Offers specific energy and power capabilities||High cost, self-discharge and heat generation at high temperatures|
|Used routinely in computer and medical equipment||Much longer life cycles than lead-acid and abuse tolerant||The need to control hydrogen loss|
|Lead-acid batteries||Used in commercially available electric vehicles for ancillary loads||High power, inexpensive, safe and reliable||Short life cycle, poor cold-temperature performance and low specific energy|
|Ultra capacitors||Usually used as secondary energy-storage device in EVs||Can provide additional power during acceleration and hill climbing||Used as a complementary energy-storage source, rather than on a stand-alone basis|
How QuantumScape battery works?
QS is in the business of producing lithium-metal solid-state batteries. The company spent >10 years developing a proprietary solid-state battery technology to meet the gradual but imminent shift to zero-emission vehicles.
Additionally, the battery tech QS is developing offers greater energy density, longer life, faster charging and greater safety when compared to today’s conventional lithium-ion batteries, according to its presentation.
One of the key selling point of QS is its proprietary solid-state separator. This is the core technology that enables reliable cycling of lithium-metal anode battery. In layman terms, this implies significantly greater energy density and faster charging relative to its competitors.
In practice, this means EVs can go further while requiring minimal charging.
QS also excels in the patent department. It owns on an exclusive basis, 80 issued US patents and 42 US pending or allowed patent applications, 102 foreign patents and applications, and 3 registered US trademark applications, as of December 14, 2020. Consequently, the issued patents start expiring in 2033.
The EV battery space is relatively new, but that has not stopped companies entering the space. While most EV battery companies remain private, we are now seeing a rush of these companies coming to the public market via SPACs.
Here are just a few of companies involves in developing, research and producing EV batteries.
Is QuantumScape profitable?
QuantumScape has little to no revenues (not meaningful) for the foreseeable future, let alone being profitable. Here’s an idea of QS’s manufacturing timescale and projected financials.
Realistically, QS is guiding for 2027 before meaningful revenue can be generated, as per the projections. For an old-school investor, this is almost unfathomable given its current valuation.
However, further digging into its addressable market suggest an entirely different story.
As a bottom fundamental investor, we acknowledge that the company’s financial projections above remains uncertain until it delivers. 🤔
We are excited with what QuantumScape can bring to EV battery space. Based on the board composition and combined the credibility of its anchor investors and its patents, we think QuantumScape can truly create the next generation solid-state battery.
Furthermore, the global electrification of vehicles put QuantumScape in great demand. We have full confidence that electrification is the way forward and we’re only at the beginning.
But, is Quantumscape really worth close to $50 billion today? For a company that projects meaningful sales numbers in 2027 (almost 6 years from the time of writing), we find the valuation challenging even for a thematic investor. The current state of the market also adds to the possibility of an overvaluation, not just for the stock, but the wider sector.
Lastly, another reason that could explain the rise in QuantumScape stock price is that the market has little pure-play alternatives. As mentioned earlier, most EV battery companies today remained private. But, SPACs are gradually reversing the trend and we expect more and more battery companies to be listed.
Watch this space!