sommart
sommart
QuantumScape (NYSE:QS) is a company developing a new kind of battery that can store more energy and eliminate the drawbacks of lithium batteries. The needs and long-term prospects of this niche are bright, but in our analysis, we will discover more about the company’s performance and its unrealized target and production timeline, which gives us a more cautious outlook - hence a Hold rating overall.
Image created by author
Firstly, we need batteries because we are replacing fossil fuels. Currently, the most possible and common way to replace them is by renewable energy like solar and wind. As such, the amount of electricity generated by solar and wind is increasing tremendously every year in most countries, like China, America, and South-east Asia, all of which are bestowed with abundant lands, sunshine and wind.
Ember
But there are problems with our increasing reliance on solar and wind. Firstly, renewable energy like solar and wind are intermittent, which refers to the fact that the availability of energy is unknown and uncontrollable. A way to look at this is the “capacity factor” of these projects, which refers to the electricity output relative to the maximum possible output. It is almost impossible for them to reach 50%. Another problem of using renewable energy is that, our grid is not ready for connecting all projects in development because of the electricity load. So we desperately need energy storage.
On the other hand, to replace fossil fuels we are electrifying our machinery, such as cars, devices, and so on. We use batteries for storing electricity to power these devices. And we have seen an almost exponential improvement in battery technology that even a plane can be powered.
Guardian
This brings us to another topic: why our current battery is insufficient? A month ago, Tesla, which has the most advanced vehicle battery technology, was facing difficulties in charging and functioning under extreme cold weather. People have started to see the flip side of electrification and lithium batteries, even though they have talked about it in the industry for many years.
The three most critical parameters of assessing batteries are density (i.e., how much it can store), charging time (i.e., how long it takes to charge), and usable capacity (i.e., efficiency). A traditional lithium battery that uses electrolyte and two electrodes has limited density and thus the amount of electricity it can store, thus the unviability of powering a long-haul flight using batter, and has major drawbacks when the weather is too cold, the electrons cannot be transmitted properly, thus the Tesla situation.
Targray
Therefore, ideally, a solid-state battery, which is based on having a solid material as the electrolyte, solves the problems of traditional lithium-ion batteries of having lower density and prone to degradation during cold weather.
According to the company’s Q4 2023 Earnings Call, 2023 "marked the beginning of a transformational period for QuantumScape". It started with the shipment of their first A0 prototype cells in late 2022. One of the customers of these prototypes was their long-standing partner, the Volkswagen Group, whose battery manufacturing arm PowerCo confirmed that their best-performing cell achieved over 1,000 cycles with over 95% capacity retention. This was perhaps the most notable R&D-related development for the company.
Investors are excited to see these recent updates from the company. But there are caveats in the news:
The test results “depends on the model”: Currently, the test still stays in the lab with ideal conditions based on the simulation model and testing. But there is no testing in real-life conditions
The test is “a milestone on the way to production”: QuantumScape management has originally projected commercialization and production in 2027, which then needs 3 to 4 years more for a big vehicle manufacturer to fully adopt. Therefore, while this is a milestone for the company, it may not have an immediate impact on the company's business
The current 5Ah-format battery is only a prototype, but the whole financial projection of the company is based on 50Ah, which is completely different in terms of application constraints. Will the test results apply to the long-term products of the company? This remains an unknown.
QuantumScape
On top of technology, another was the appointment of their new CEO, Dr. Siva Sivaraman, who has decades of experience scaling production for technology products by building factories and establishing partnerships. The company’s former CEO Jagdeep Singh will then transition into a Chairman role. This signals that the company is trying to accelerate its production and commercialization timeline.
Other notable developments related to their scientific progress include a 60% improvement in capacity per unit area for their new cathodes, improved packaging efficiency for their QSE-5 product enabling higher energy density as compared with their A0 prototypes, improving the cathode - separator interface to improve the reliability, reducing particle contamination and improving the cell’s components and processes. These improvements have allowed them to integrate higher loading cathodes and better packaging methodologies into their Alpha-2 prototype cells that they plan to ship in 2024.
Their final goal was to introduce their new fast separator heat treatment process as it is one of the costliest parts of ceramic processing and often the main hurdle in terms of throughput. This improved process has already been rolled out in the form of its first stage, also called Raptor, which was successfully deployed in Q4. Its successor, Cobra, is planned to be deployed soon. They are already operating prototype versions of Cobra heat-treating equipment.
For 2024, QuantumScape’s focus is to take improvements they have demonstrated at the component level in 2023 and integrate them into one design, the QSE-5, their first commercial product. The company’s 4 goals are as follows:
Ship a round of Alpha-2 samples
Transition from initial deployment of Raptor at 2023 end to its full planned run rate, which would enable low-volume QSE-5 prototype production in 2024.
Begin low volume B0 prototype production for their first commercial cell, QSE-5, as stated above. B0 prototypes are closest in product design to the QSE-5.
To prepare for Cobra production in 2025, which will support higher volumes of QSE-5 production.
Although the company’s market performance is impressive, there were many tailwinds in what was a relatively volatile year. The reducing inflation numbers and ticking expectations for interest rate cuts buoyed the market to a successful year, with the S&P 500 ending up 26% higher. High growth, pre / low - revenue stocks such as QuantumScape also had a great year, as visible from ARKK’s performance, which rose 78%. Thus, a deeper dive into its financials is a must.
The company’s capital expenditure for the year 2023 was $84.5 mm - an impressive feat considering its range of achievements in 2023. Furthermore, its 2024 capex forecast of $70 - 120 mm and EBITDA loss forecasts of $250 - 300 mm are not likely to hurt the company given its liquidity of $1.07 billion at 2023 end.
When compared with its revenue generating peers Amprius Technologies (AMPX) and Microvast Holdings (MVST), Quantum Scape looks relatively overvalued in some of the forward-looking ratios based on future sales and revenue, taking into account forward forecast for the year 2027, which is when the company expects to generate its first revenues.
Image created by author with data from Seeking Alpha
Thus, when taking into account the above relative valuation, the stock currently does not offer any entry signs since its peers like AMPX and MVST are already making revenue with stable growth, but QS, despite only looking to start making the first sales in 2027, is priced higher than these peers. Therefore, the target P/S ratio should be at around 50x.
Image created by author with data from QuantumScape
Based on the target P/S ratio and our model forecast at 2027 when the company first makes its sales, the target valuation we are giving QS would be at $7.36.
The company has a record of delaying production and timeline, which makes our revenue forecast in 2027, which has a 3-year window for further delay and hiccups possible. An investor should pay attention to the progress updates and adjust position since a further delay will negatively impact the company’s target price
As mentioned, battery technology is one of the hottest areas for investment and many competitions can be foreseen. QS’s prospect will therefore be dependent on its competitiveness. But a strong competitor will surely impact the company’s valuation
Under the current high interest rate and slowing growth environment, investors should pay attention to the burn rate and runway of the company, in case of any financing needed
From the above, we can see that even though the sector is enjoying the tailwinds of having high demands in battery innovations, the reasons for our Hold rating are clear: the company still needs 3 years or more to realize the mass production phase and the first sales, before which there are uncertainties like further financing and increasing competition. But on the other hand, the valuation compared with its peers who are revenue-making is high, which cannot be justified from its 0 current revenue.