Why is QuantumScape (QS) Not a Buy Despite Battery Test Triumph?

Solid-state battery manufacturer QuantumScape QS has started 2024 on a great note, achieving a major milestone. Shares of the company rocketed more than 40% yesterday after Volkswagen VWAGY confirmed that QuantumScape’s batteries successfully passed the endurance test conducted by the German-auto giant’s subsidiary, PowerCo. As a partner and potential customer, Volkswagen has invested in and tested QuantumScape's solid-state electric vehicle (EV) battery technology.

Will Solid-State Batteries be a Game Changer?

Investor concerns over the slower pace of EV sales growth, attributed to insufficient charging infrastructure and limited range, have prompted a search for solutions. The limited range of existing EVs, ranging from 250 to 300 miles, deters consumers from embracing EVs due to concerns about potential low battery levels without accessible charging stations. The solution to this may lie in solid-state technology.

Solid-state technology, distinguished by a lithium-only anode battery devoid of liquid electrolytes, holds promise.While still in the early stages, solid-state batteries are anticipated to offer advantages such as reduced costs, faster charging, extended range and enhanced safety compared to current technologies. The potential outcome could be electric vehicles that are not only cost-competitive with gasoline cars but also boast a range of 600 miles per charge.

What’s All the Excitement About?

PowerCo’s endorsement of QuantumScape's solid-state battery cell, exceeding expectations in endurance tests with over 1,000 charging cycles, has fueled investor enthusiasm. This equates to approximately 500,000 kilometers of driving. Describing the test as "an important milestone," the company highlighted that despite substantial wear, the battery exhibited minimal aging, retaining about 95% of its capacity after the test ended.

The results not only outperform QuantumScape's commercial target of 800 cycles and 80% energy retention but also exceed industry-standard goals for solid-state cells in this developmental stage, which typically aim for 700 charging cycles and a maximum capacity loss of 20%.

Buoyed by the promising results, the stock popped 43% yesterday to close the session at $9.30 share. The question that arises is whether investors should capitalize on this positive news and buy QuantumScape, or is it prudent to consider selling amid this impressive rally?

QS is Indeed Making Progress

QuantumScape’s next-generation cutting-edge batteries are set to revolutionize the e-mobility landscape. The solid-state battery aims to surpass existing lithium-ion technologies, promising quick charges, increased range, reduced weight and heightened stability. Set to disrupt the world of batteries, QuantumScape claims that its batteries are designed to offer up to 50% longer range than the existing lithium-ion batteries and will also make the cars safer.

QuantumScape made notable strides last year, including shipping prototype battery cells to potential customers for rigorous testing. The company has progressed from developing and testing in its own facilities to extending this phase to original equipment manufacturer (OEM) partners for further evaluation.

In the summer of 2023, QuantumScape hired Dr. Siva Sivaram, a seasoned professional with experience in the semiconductor industry. As the company is shifting focus from research and development to battery production, it stands to benefit significantly from the insights of an industry veteran. The intricate process of battery production is analogous to semiconductor manufacturing.

QuantumScape's CEO, Jagdeep Singh, emphasized the significance of lab results from Volkswagen, stating that they affirm his company's "exceptional performance." Singh highlighted that no other automotive-format battery exhibited such high discharge energy retention, reinforcing confidence in QuantumScape's technological prowess.

Is That Enough to Buy the Stock?

It should be noted here that these lab results are based on a single sample in a controlled laboratory setting, not a full battery pack in a real-world scenario.Transitioning from laboratory success to practical applications requires substantial additional work. So, investors should exercise caution before jumping to buy the stock on the remarkable lab results.

The road to commercializing the battery for mass-market vehicles is long. Battery chemistry is just one aspect. The challenge extends to scaling up production efficiently and cost-effectively. QuantumScape is at least a year away from commercialization, and the company must demonstrate its ability to scale up production effectively.

Even upon commercialization, competition looms, given Toyota's plans for solid-state battery mass production by 2028 and Chinese automaker Nio making strides with longer-range, faster-charging designs.

QuantumScape anticipates to post revenues of $14 million and $39 million in 2024 and 2025, respectively. It targets to scale up to $275 million and $3,210 million in 2026 and 2027, respectively. While that may sound good, it's quite far out in the future. Despite ample liquidity, high capital expenditures and research and development costs pose challenges, impacting margins once sales commence.

While solid-state batteries could alleviate range anxiety, potential upsides for QuantumScape's shares remain speculative, given the uncertainties.

Final Word

QuantumScape presents significant potential but is inherently a high-risk, high-reward investment. For investors intrigued by the technology and who have a high-risk appetite, QuantumScape could be a fitting addition to a diversified portfolio.However, given the challenges associated with reliable and cost-effective production at scale, expectations of significant short-term surges should be tempered.

While there may be a temptation to buy the stock, the potential returns hinge on the reliable and consistent production of this product at a cost that ensures viability. Additionally, the product must meet expectations in real-world performance.

Despite the significant gains observed yesterday, the stock still remains 92% below its peak. But it is preferable to adopt a wait-and-see approach for now as QuantumScape is yet to prove itself in various critical aspects.

QuantumScape currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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