As much as investors want otherwise, the fact is that newer technologies often require a lot of time, passion, and commitment to succeed. Further, more than investors, it is companies and their management teams who would like to see the positive results of their painstaking efforts.
Yet, as an investor, you are rightfully looking to generate solid returns from your investments. So it is very important to properly understand the businesses you invest in and set the right expectations in terms of risks and returns from your investments. QuantumScape (QS -3.09%) is one such stock that got investors excited as soon as it went public. But nearly two years later, the stock is 90% off its all-time high price. Is it a buy now?
A big red flag
QuantumScape is researching solid-state battery technology. These next-generation batteries are believed to be far superior to the lithium-ion batteries in use currently. Solid-state batteries have much higher energy density and thus can be charged much faster than typical lithium-ion batteries.
Solid-state batteries have been under research for decades, and no company has so far been able to successfully commercialize them due to numerous technical and cost considerations. A key hurdle in the development of solid-state batteries is the formation of dendrites. Dendrites are needle-like formations of lithium metal that can short-circuit the cell. QuantumScape believes that it has overcome this hurdle.
In its first-quarter 2021 earnings letter released in May 2021, QuantumScape outlined its expectations to achieve commercialization of its batteries by 2024-2025. However, during the latest earnings call, management suggested that commercial production at a meaningful scale may not begin before 2026. That looks like a delay of at least a year from the previously expected commercialization date. What's more, this new timeline is a bit hazy, suggesting that management may be a bit unsure of how things will roll out exactly.
Now, such a delay may look like a minor hiccup some years down the line, if QuantumScape delivers the promised batteries. If QuantumScape achieves that feat, it'll surely find many takers for its products. But investors should note that this is a big "if." Although management sounds confident, it remains to be seen if the company really achieves what it is aiming for.
As of today, QuantumScape is a pre-revenue company that is expected to remain that way for at least three more years.
Ready buyers
QuantumScape's solid-state batteries can prove to be a game-changer in the electric vehicle (EV) industry. Longer range and a lower recharge time can significantly accelerate the transition from internal combustion engine vehicles to electric ones. For that reason, the company finds a lot of interest from traditional auto companies as well as newer EV companies.
QuantumScape boasts of agreements with six prospective auto customers, including pure-play EV companies as well as traditional automakers. So the key hurdle for QuantumScape is making the batteries, not finding potential buyers.
Progress so far
In the second quarter, QuantumScape made prototype 24-layer cells and started testing the same. Notably, the battery cells that can be used in EVs will require several dozen layers in each pack. So the company still has a long way to go. The company hopes to deliver a 24-layer sample cell, which it calls the "A" sample, to an automotive customer this year. But it expects to deliver a cell that has all the needed functionality, called the "C" sample, by the end of 2025.
QuantumScape believes that its extensive patent and intellectual property portfolio is its key competitive strength. It has generated more than 250 patents and patent applications so far. It believes that its proprietary solid-state separator uses the only known material that can cycle lithium under real-world test conditions without forming dendrites.
A risky stock
Clearly, QuantumScape has significant potential. However, it is yet to prove its technology, let alone generate revenue. According to the company's own expectations, it won't be generating meaningful revenue until 2026. In all, QuantumScape stock entails significant risk and is suitable only for the high-risk portion of your investment portfolio.
