Is QuantumScape Stock Overvalued Or Undervalued?

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The Alpha Sieve
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Summary

  • We examine some of the encouraging facets of the broad QS story as well as the recent earnings.
  • We touch upon the forward valuations that currently look intimidating.
  • We touch upon the technical picture and the positioning of market participants.
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Company profile

QuantumScape Corporation (NYSE:QS), founded in 2010, is a company that is fast gaining traction in the battery development and manufacturing space. Note however that QS currently does not generate any revenue and plans to enable commercial production only after 2024. The company is also noted for the attention it receives from the Volkswagen Group which has invested over $300m since 2012. Incidentally, the QS stock only made its listing debut in November 2020 via a reverse merger with Kensington Capital Acquisition.

QuantumScape Corporation- What’s to like?

QS is currently developing batteries based on its proprietary lithium-metal solid-state separator technology; these batteries have an edge over the traditional lithium-ion batteries as the former offers stronger energy density, faster-charging abilities, and a relatively longer life, relative to the latter. Crucially, the solid-state separators used in QS’s batteries also enable greater safety and reduce short circuit risks; under the traditional battery tech which uses porous separators, there’s a high risk of lithium dendrite formation, which can cause short-circuits in the cell.

QS’s battery tech is also likely to offer a cost manufacturing edge over the traditional setup as it is based on anode-free architecture (so, in this case, the material costs or processing costs associated with anodes don’t come into the equation). Also note that volumetric energy density is likely to be higher without these added anode host materials which are typically carbon or silicon-based. For instance, most lithium-ion batteries used in the auto industry have an energy density of less than 300Wh/kg; QS’s lithium metal batteries have the potential to offer density numbers upwards of the norm.

Also consider that QS’s battery tech is seeking to address some long-standing conflicts in the EV battery space, one of which is that old trade-off between energy and power. This dynamic is best represented in the image below. Consider that the top-selling EV in the market takes over half an hour to reach 80% charge, yet you'll get the benefit of long-range of over 700Wh/L. At the other end of the spectrum, you have a high-performance EV that offers 80% charge in 20 minutes, but can only provide you with 600Wh/L. On the other hand, QS’s cells which are based on the solid-state lithium metal tech, offer the dual benefit of higher energy and power and this is something they are looking to optimize even further.

Power-energy tradeoff

Q1-22 Shareholder letter

There have also been some promising developments beyond just the core EV battery tech story. QuantumScape is also seeking to make its presence felt in the stationary energy storage applications market, a $385bn global market opportunity, and one that is likely to grow by 2000% until 2030. Recently QS got into a strategic deal with stationary storage leader- Fluence Energy (FLNC) whereby the former’s high energy density battery tech will be used to augment the latter’s offerings. You would think that over time, QS will get into more partnerships of this ilk.

Key highlights from recent earnings

QuantumScape Corporation had published its Q1-22 results in the last week of April, and the headline numbers came up short, with negative EPS of -$0.21, falling short of street estimates by approximately 29%. This represents the third successive quarter where the normalized EPS has come in below street estimates. Interestingly, the sell-side analyst community is currently largely cagey about the prospects of QS shares. Out of the nine analysts that cover the stock, only one has a BUY rating, whilst the rest all have HOLD ratings.

Despite the weak headline number, there were quite a few other encouraging aspects from the results.

One of the important facets of QS’s developing battery tech is to ensure greater energy density within a battery cell, and one way to go about this is to assemble its single-layer building blocks into multi-layer formats without compromising on yields and other performance metrics. These are important building blocks for QS’s tech to gain validation and thus increased adoption in the community. Until Q1, the company had completed 800 cycles (under gold-standard conditions, which calls for a certain charge/discharge rate, room temp of 25 degrees, etc.) with regards to their single-layer (in late 2020), 4-layer (in August 2021) and 10-layer formats (in November 2021). In Q1, their 10-layer cells were also incidentally tested by one automotive customer (these cells had also entered the testing phase with another customer), whilst crucially, the company was also able to build up its layer count to 16 and complete 500 cycles; the next goal will be to complete 800 cycles on its 16-layers and then keep successfully ramping up the level of layers (as seen in the image below), without compromising on yields. The eventual number of layers will come down to each OEM customer’s requirements, but think about how higher energy density could enable EV players to ramp up range without adding further weight to the battery pack. This could certainly enhance the competitiveness of an EV that runs on QS’s battery tech.

Mutli-layering progress

10K

Then, in the previous section, I noted the important role of the separator in QS’s battery tech. One of QS’s priorities is to ensure a smooth ramp-up of separator films across time, eventually targeting peak weekly starts of 8,000 by the end of this year. So far, they’ve made good progress on this front; from the Q4-21 run rate of less than 2,000 weekly starts they closed Q1-22 at over 3,700 weekly starts.

In Q1 the company also managed to get a third top-10 auto OEM onboard, who signed up for 5MWh of cell production capacity from their pre-pilot production line- QS-0 which will kick off in 2023. Encouragingly there also appears to be a roadmap to expand this to a potential JV facility producing up to 50GWh cells p.a.

Is QuantumScape Stock Overvalued or Undervalued?

Since its debut on the NYSE (November 27, 2020), the QuantumScape stock has seen its price collapse by nearly 3x, from the listing date’s closing price of $37. You would imagine that a pronounced weakness of this sort, would at least make the forward valuations look acceptable, but that certainly isn’t the case here.

We know that QS is currently a pre-revenue company and Seeking Alpha estimates point to FY23e expected sales of $1.11m. QS’s goal is to enable commercial production of batteries by 2024, so FY24e sales are expected to dramatically surge by more than 12x and hit $12.47m annually. This is still not sufficient to make the forward price to sales multiple particularly palatable, as you’re looking at a mind-boggling P/S multiple of 504x, based on the FY24 numbers (the corresponding FY23 P/S multiple is 5657x).

Alternatively, consider something like a Solid Power (SLDP) which is also attempting to make waves in the solid-state lithium metal batteries space. SLDP’s market-cap is much lower at only $1.296bn (QS's market cap is over $6.25bn), and it is poised to deliver significantly higher annual sales of $4.73m (vs QS of $1.11m), giving it a lower price/sales multiple of 274x (FY24 sales estimates are not available for SLDP).

Having said all this, when you’re gauging the prospects of a potential battery tech disruptor such as QS which is still in a development stage and adjusting its engineering infrastructure, it probably makes sense to not get overly bogged down with the valuations at this juncture. The more sensible approach would be to take the long view, perhaps only maintain a small position for now (if any), and track the progress of certain catalysts and ramp up/scale down accordingly; for instance, consider if the timelines linked to QS-0 and QS-1 are being fulfilled as per originally planned, then, is QuantumScape able to sign fresh agreements with more auto OEMs (as of Q1-22, they had deals with three top-10 OEMs); can they convert these agreements to long-term JVs? Are they making progress with incorporating higher-layer cells without compromising on yield and performance? How soon can they hit 16-layer cells and beyond run over 800 cycles under stringent test conditions? Are there opportunities to license their technology or battery manufacturing capacity to other manufacturers? Are they signing new deals beyond the auto OEM space and deepening their impetus in stationary energy or in the consumer electronics arena? If some, or all of these things flourish together, you could see QS’s revenues snowball quite quickly, bringing the valuations to more acceptable levels.

Closing thoughts- Is QS Stock A Buy, Sell, or Hold?

If you’re looking for attractive opportunities in the lithium and battery tech space, QS ought to be on your watchlist as the stock’s relative strength ratio as a function of the Lithium & Battery Tech ETF (LIT) is currently at record lows of 0.2x (just for some added perspective, something like a TSLA trades at a relative strength ratio of 12.4x over LIT)

QS:LIT

Stockcharts

Would I then pursue QS as a potential trading opportunity at this juncture? Not yet. From late January 2022 till the end of March, I was enthused to witness some bottom formation and a break past the descending channel boundary (indicating that selling momentum had stalled), but after crossing the $22 levels we have since seen another bout of correction, which still appears to be underway. Until I see some stability at the lower levels, I would not want to go long on the stock as yet. Besides, also do consider that alongside Luminar Technologies (LAZR), the QS stock currently has the highest short interest (16.25%) amongst 36 auto parts and equipment stocks covered by Seeking Alpha, reflecting the high degree of bearishness with which market participants view the stock.

Weekly chart

Trading View

Also do consider that the influential institutional investor community which is responsible for big moves has been trimming its stake in the QS counter over recent months. At the end of last year, 683 institutions owned the QS stock, representing an ownership percentage of 40%; now we have only 576 institutions, with the current institutional ownership stake at a little over 30%.

Institutional investor ownership

YCharts

Conversely, these guys have been increasing their stake in close peer- SLDP, which has gone up from 9% at the end of last year, to over 13% currently (in December only 70 institutions owned the SLDP stock, now it is 84).

Institutional investor ownership

YCharts

To conclude, I believe QS has the right building blocks to become a disruptor in the battery tech space, but there are still plenty of hurdles to clear. I also don’t believe it makes great sense to short at these levels. All things considered, I’d rate the QS stock as a HOLD.

This article was written by

The Alpha Sieve profile picture
1.51K Followers
Investment research, primarily oriented towards uncelebrated/under-covered stocks and ETFs, across North America, Europe and Asia. Seeks to combine both fundamental and technical disciplines while making an investment/trading proposition.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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