In an emerging technology area, a challenge is investing ahead of the technology. QuantumScape (NYSE:QS) became a darling of the solid state battery space because it was optimistic about its prospects to leapfrog existing lithium battery technologies at a time before solid state battery technology had been perfected. The point is that it is still early days for solid state batteries. I'm cautious about QuantumScape's stock price in 2022 because it is hard to see news that will move the dial, even though in the longer term there might be a place for QuantumScape in the transport battery space. Tesla's (TSLA) recent developments in battery technology indicate that QuantumScape doesn't own battery advancements.
QuantumScape was founded in 2010 with a big goal of revolutionising the batteries that power BEVs (Battery Electric Vehicles). It has focused on key areas of battery life, charging speed and cost. The claim is that today these challenges have been solved, but solving a challenge and commercialising it are not necessarily events that happen at the same time. Indeed the time between proof of concept and commercialisation can be long. QuantumScape's core technology involves a solid-state lithium battery, which involves a solid ceramic electrolyte separator which keeps anode and cathode apart. In a second development, their lithium anode is created in the process of charging the battery. So the battery is described as having an anodeless architecture. QuantumScape claims the battery design is dramatically simplified and fundamentally cheaper to manufacture. It is claimed to have improved energy density, charging speeds, battery life and safety. The solid ceramic electrolyte is non-flammable and non-combustible. QuantumScape has invested more than $300 million in its solid-state battery technology. This is a great pitch and may end up being a valuable part of the BEV transition. The challenge is that solid-state technology is very new and unproven and I doubt that all of the claimed advantages have been implemented for actual real-world use.
QuantumScape has revealed that a number of carmakers are testing its solid-state batteries, but at this stage, these tests seem to involve only a small number of vehicles (tens not hundreds). At this stage, only Volkswagen (OTCPK:VWAGY) has been named as a partner/potential customer, although QuantumScape claims that now four major companies are testing their batteries, with one being a top-10 global manufacturer and another an "international luxury automotive company".
Note that Volkswagen (through Porsche Automobil Holding SE (OTCPK:POAHY)) is the biggest shareholder of QuantumScape, owning ~19.8% of the outstanding shares. There is also a JV, QSV, between Volkswagen Group Of America Inc, Volkswagen Group of America Investments LLC and QuantumScape, with each party owning 50%. This JV was effective September 2018 "with the goal of jointly establishing a manufacturing facility to produce the pilot line of the Company's product through QSV". There are two operating agreements to this JV covering rights and obligations as well as a Common IP Licence Agreement. QSV's results are consolidated with those of QuantumScape. There is some fine print to the JV that is worth exploring in the above link.
In January, QuantumScape announced expansion of its solid-state battery interest to stationary storage in a multi-year partnership with Fluence (FLNC). QuantumScape CEO Jagdeep Singh claims the stationary storage market is similar in size to the BEV market. The Fluence partnership is about QuantumScape getting an understanding of the market. When asked whether this means a change in focus for QuantumScape, Singh acknowledged that the focus is still on transportation. He then went on to acknowledge that areas such as stationary storage, consumer storage devices and even aviation might be other applications. I wonder whether the Fluence deal is more focused on supporting a falling share price than any change in business direction.
It has been a while since I last looked closely at QuantumScape. Last time I paid attention, QuantumScape management was very confident of taking on Tesla and being the "go to" company for BEV batteries. There was a lot of talk about getting manufacture scaled up and leaving Tesla far behind in the BEV battery space. I was a little surprised at the positioning of the Q1 2022 transcript and Q&A. This was a much more tech-focused discussion and gone was the big talk of taking over with their solid-state batteries. It was all about details that to me seem much more at the developmental stage of working out what the final product(s) will look like, rather than having development solved and commercialising the technology being the big push. It was all about good progress on making multilayer cells from single to four, then 10 and finally 16, with a view to even more layers. It was all proof-of-concept. And it was emphasised that these multilayer developments require more work on quality and consistency of materials; scale is another issue that is being worked on. This is a significant clarification about the status of QuantumScape's product developments and a warning for investors that commercialisation and good times are not necessarily close.
It is interesting to get a sense of how other major solid-state battery competitors are positioning the status of their technologies.
Toyota has been talking about solid state batteries for some time, but the latest from Toyota is that it plans to release a solid state battery in 2025 and this will be in a hybrid. This makes no sense if their solid state battery is ready for implementation in a BEV, because one of the key features of solid state batteries is supposed to be longer range. Why introduce a solid state battery in a car that drives primarily on an ICE (Internal Combustion Engine)? The rationale from Toyota is that their solid state batteries are not robust enough to cope with full BEV installation. Toyota has 1000 patents in solid state battery technology, more than any other company; QuantumScape claims 300+ patents. Toyota's plan indicates that at this stage the company has reservations about the readiness of solid-state battery technology for full implementation even by 2025.
Nissan (OTCPK:NSANY) has very recently announced plans to release a BEV with solid state batteries in 2028. This is a development that is worth following, but at the same time, it is important to note that lots of major car companies are releasing BEVs with substantial range which are not based on solid-state batteries.
The technology that companies like CATL, BYD (OTCPK:BYDDF) and Tesla are using in their vehicles is not standing still. There are millions of batteries in BEV vehicles and this undoubtedly provides rich real-world experience for BYD, Tesla and other car manufacturers.
Tesla is getting on with its own lithium battery developments and the specs for those batteries are looking as if they might match or even exceed what QuantumScape plans for its solid state batteries. And the cost reductions for Tesla batteries are impressive. At best QuantumScape might achieve a similar result to Tesla, but if so it will deliver this beyond 2026 and maybe considerably later.
The level of battery production by Tesla is dramatically different (~1.5million vehicles) from what QuantumScape (batteries in a few prototypes) is doing. And Tesla plans for battery expansion are very ambitious. Meanwhile, QuantumScape remains focused on technical issues with no concrete plans for when it will compete with Tesla. Tesla has an amazing capacity to integrate different elements of its vehicles, including batteries, and this provides another key differentiator for Tesla. For QuantumScape to compete with Tesla they need a vehicle partner to work closely on the battery vehicle integration. This could be Volkswagen through the JV, but it isn't clear how advanced this JV is at this stage.
I can't help but think that the current share price gloom for QuantumScape (down 58.6% year on year), although part of a general market trend, is not helped by CEO Jagdeep Singh focusing on technology at a time when the market may have been expecting to see penetration of the QuantumScape solid-state battery technology into significant prototype adoption.
With cash operating expenses in 2022 expected to be in the range of $225-$275 million and there being cash, cash equivalents and restricted cash at $300 million as of March 31, 2022, cash could be an issue. However, at Q1 2022 reporting the company indicated that it expects to enter 2023 with $800 million liquidity. Form 10-Q dated May 2, 2022 indicates substantially more than this amount in commercial paper, US Govt securities and Corporate notes and bonds, so there is no urgent cash issue. However, from here on things start to get expensive and this is likely to make investors cautious.
The overwhelming view of nine Wall Street analysts in the past 90 days is "hold", although there is one true believer with a strong buy rating. The only Seeking Alpha author covering the stock in the past 30 days has a hold recommendation.
I'm a fan of getting in early with technical innovation, but timing is critical. It isn't clear that QuantumScape's technology is sufficiently advanced to become competitive in the race for better BEV batteries. This makes investment in QuantumScape at this time very risky, unless you know things that I'm not aware of. I don't see 2022 as the year when QuantumScape reverses the pessimistic view of its stock.
I am not a financial advisor but I follow closely the technologies that are driving the electrification of transport and this includes battery technology. I hope that my comments help provide perspective for you and your financial advisor as you consider possible investment in QuantumScape.
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Disclosure: I/we have a beneficial long position in the shares of BYDDF either through stock ownership, options, or other derivatives. 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.