QuantumScape (QS -3.09%), a developer of solid-state lithium-metal batteries, went public by merging with a special purpose acquisition company (SPAC) on Nov. 27, 2020. Its stock started trading at $24.80 on the first day and soared to a record high of $131.67 less than a month later. But as of this writing, it trades at about $5.
QuantumScape initially impressed investors with the disruptive potential of its solid-state batteries, which are less volatile, more heat resistant, and charge more quickly than traditional lithium-ion batteries. But that enthusiasm quickly waned as the company repeatedly delayed the commercialization of its first batteries.
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QuantumScape still hasn't commercialized any of those batteries or generated meaningful revenue. So should you take a chance on this speculative energy stock, or should you stay away until it proves its business model is sustainable?
QuantumScape has a lot to prove
Solid-state batteries are powered by solid electrolytes instead of the liquid electrolytes used in lithium-ion batteries. That makes them more stable, but it also makes them pricier and more difficult to mass produce. Solid-state batteries are already used in smaller devices like wearables and pacemakers, but they haven't been mass-produced for mobile devices or electric vehicles.
Yet those challenges haven't deterred QuantumScape from trying to develop more advanced batteries. Its QSE-5 batteries have an energy density of more than 800 Wh/L (watt hours per liter), versus an average density of 300-700 Wh/L for lithium-ion batteries, and can be rapidly charged from 10% to 80% in under 15 minutes.
After several delays, QuantumScape finally started producing and shipping the first samples of its QSE-5 batteries to some of its automotive customers in the third quarter of 2024. It will continue shipping low-volume test samples of the QSE-5 over the next few quarters as it transitions from its current Raptor separator process to its new Cobra separator process -- which will improve its cell reliability, yield, and equipment productivity. QuantumScape expects the sweeping Cobra upgrade to support the commercialization and mass production of its batteries, but it doesn't expect that to happen until 2026.
For now, analysts expect it to rack up net losses of nearly $500 million for 2024, 2025, and 2026 before finally generating $7 million in revenue in the final year. That's not a lot of revenue for a company with an enterprise value of $1.9 billion.
The bull case vs. the bear case
The bulls believe QuantumScape can scale up its business and gain an early-mover advantage in the solid-state battery market, which Research and Markets estimates will grow at a compound annual growth rate of 30% from 2023 to 2030. They'll also point out that it's backed by Volkswagen, which has been co-developing QuantumScape's batteries for over a decade. Volkswagen even established a new group, PowerCo, to test QuantumScape's batteries in 2022.
The bears expect QuantumScape to struggle with more delays and soaring costs as it tries to commercialize its batteries. It ended its latest quarter with $841 million in cash, cash equivalents, and marketable securities, but it's diluting its investors with secondary offerings to raise that cash. Its number of outstanding shares has already risen by nearly 50% since its public debut, and investors should expect that dilution to worsen as QuantumScape commercializes its batteries.
QuantumScape also isn't the only company trying to mass-produce solid-state batteries. It also faces stiff competition from similar start-ups like Blue Solutions as well as big automakers like Toyota and Nio in the nascent market, and it could quickly become irrelevant if one of those competitors crosses the finish line first.
Last but not least, QuantumScape's insiders have been net sellers of the stock over the past 12 months. That chilly insider sentiment suggests it's too early to bet on the company's long-term recovery.
Is it the right time to buy, sell, or hold QuantumScape's stock?
QuantumScape's solid-state battery technology is promising, but its stock looks overvalued relative to its near-term growth potential. I'd personally sell or avoid this stock -- and only buy and hold it when a few more green shoots appear.
