Electric vehicles (EVs) are poised to revolutionize travel. Yet, like any trailblazing technology, EV batteries have a way to go before widespread adoption is commonplace.
QuantumScape (QS 3.99%) is a company at the forefront of battery innovation. Its mission is simple: To overcome the limitations of modern lithium-ion battery technology and pave the way for a cleaner, electrified future. The company made news earlier this year when it had positive results during an endurance test, and it recently secured funding to extend its runway for a couple more years.
With such developments, is now a good time to invest in the EV battery company? Let's dive into the business to find out.
NASDAQ: QS
Key Data Points
QuantumScape's promising battery technology
QuantumScape took the market by storm following its November 2020 initial public offering (IPO). Investor excitement for an EV-powered future sent the stock soaring to an astounding $132 per share in just a few short months as optimism for an electrified future reached a fever pitch.
Investor sentiment and hopes were high based on QuantumScape's promising technology. The company aims to overcome the limitations of modern batteries. It's developing next-generation solid-state lithium batteries for EVs with greater energy density, faster charging, and enhanced safety.
One significant hurdle to widespread EV adoption is their limited driving range. QuantumScape argues that for EVs to truly compete with traditional internal combustion engines, they must deliver at least 300 miles per charge.
EVs have been fast approaching this range. According to a Bloomberg analysis, the average range of U.S. automakers' EVs has climbed to 291 million, about a third higher than the global average. However, EVs still have a ways to go before reaching the 413-mile median range of gas-powered vehicles today.
Image source: Getty Images.
The next few years are crucial for QuantumScape
Volkswagen has thrown its weight behind QuantumScape, investing nearly $300 million in the start-up and forging a 50-50 joint venture to help it scale up to industrial-level production.
Earlier this year, Volkswagen's PowerCo completed an endurance test of QuantumScape's solid-state battery, where it "successfully completed more than 1,000 charging cycles" and noted it "could drive more than 500,000 kilometers without any noticeable loss of range."
However, QuantumScape still has its work cut out for it, which is why the stock has failed to gain traction for several years. That's because the company is still pre-revenue as it develops its technology and prepares to ramp up production. Expenses continue to build up, and it continues to burn cash. Over the last 12 months, the battery maker posted a net loss of $468 million.
QS Net Income (TTM) data by YCharts.
The company is moving closer to production and recently entered into an agreement with PowerCo to industrialize its battery technology. The agreement grants PowerCo the license to mass-produce batteries based on QuantumScape's technology. PowerCo can manufacture up to 40 gigawatt hours per year, with an option to expand to 80 gigawatt hours per year. This would be enough to power a million vehicles per year.
The deal helps QuantumScape extend its runway, thanks to a $130 million prepayment of royalties from PowerCo. It also allows it to leverage a capital-light business model and reach its gigawatt-hour scale faster under its prior agreement, and should extend its cash runway by 18 months into 2028.
Is QuantumScape right for you?
QuantumScape is an exciting company with huge potential. However, it faces stiff competition from other battery technology developers at Toyota and Nio, and it is still in its pre-revenue stage and years from generating profitable cash flow. For that reason, it's a high-risk, high-reward stock right now with elevated risk, best suited for investors with a very high tolerance for risk and a long time horizon.
The stock will continue to face volatility, and it isn't an ideal holding for most investors. However, if you're intrigued by its long-term prospects, keep it on a watchlist and see how it progresses as it works toward industrial scale -- which should provide more clarity on its path to profitability.
