Once the stuff of futuristic movies, the electrification of the automobile industry seems all but inevitable today. While Tesla ( TSLA -6.42% ) receives most of the attention from analysts and investors, there seems to be a new headline every day about an automaker touting its upcoming electric vehicle, or EV. Investors wishing to participate in this new "gold-rush" may be forgiven for hesitating to pick winners from losers from the vast offering at hand. One way to participate in this trend may be to invest instead in the companies making "picks and shovels" rather than in the "gold prospectors" themselves.
The one thing every EV needs more of
That would be range, or how long an EV can go on a full charge. As consumers consider buying an EV, range becomes key for at least two reasons: First, since there aren't as many EV chargers as there are gas stations, consumers experience "range anxiety," or the idea that they can get stuck in the middle of nowhere without a way to recharge.
Second, recharging an EV takes a lot longer than filling up. So, the longer the range, the bigger the market for, or the number of people who may buy, that EV. Today, range is arguably the most objective differentiator between a Tesla and all other EVs in the market.
Battery technology determines range. But battery technology is key in another important way: It is what makes EVs more expensive than equivalent gasoline cars today.
Imagine having an EV that could go seven hours between charges -- to then recharge in about 15 minutes. Now imagine you could buy this EV for about the same price as a gasoline car. This is what QuantumScape ( QS -10.24% ) claims its product will deliver to the EV industry.
A solid story
Many companies have worked on solid-state batteries over the years -- with nearly all of them failing to make a commercially viable product. QuantumScape itself has been working on lithium-metal batteries, a type of solid-state battery, since 2010. The company claims its batteries will store over 80% more energy than existing lithium-ion competitors while reducing costs substantially. To put this into perspective, Tesla recently announced breakthroughs in battery manufacturing that should deliver up to 54% additional range in about two years.
80% improvement at a lower cost are tall claims for any product. However, several things set QuantumScape apart. For one, it has attracted investment from a number of high-caliber investors: It received $300 million from Volkswagen ( VWAGY -2.54% ), the largest automaker in the world, and arguably one of the most committed to leading the EV transition, as well as venture capitalists such as Bill Gates and Kleiner Perkins. At the end of November 2020, it executed a successful reverse merger with Kensington Capital Acquisition Corp. ( KCAC ), a SPAC, including money from legendary investor John Doerr and Tesla co-founder JB Straubel, just to name a few. The merger put the company's enterprise value -- or the total value of its stock, cash, and debt -- at $3.3 billion. And after the merger, the combined entity has achieved a market capitalization (the value of all of its outstanding stock times its price) of over $14 billion.
The company's relationship with Volkswagen gives it another leg up: A large, marquee customer. By 2029, Volkswagen plans to sell over 22 million vehicles across about 70 EV models. While QuantumScape expects Volkswagen to be the first company to commercialize its products, it plans on selling its batteries to many other automakers.
Its executive team is no less impressive, with a number of well-known Silicon Valley entrepreneurs, and even the chair of Stanford's mechanical engineering department, on its executive team and board.
What's the catch?
While Volkswagen has successfully tested initial versions of QuantumScape's batteries, the company still has a lot of work to do to further develop key parts of the technology and turn them into a product that can be manufactured affordably and at scale. The company's recent merger and listing provided it with fresh cash -- to the tune of $700 million -- that it will put to work to do just that.
This also means, however, that the company won't have a product to sell, or any meaningful revenue, for a while -- until at least 2024, actually. So, significant stock appreciation may take a few years and will be determined by the company's progress toward product development and manufacturing milestones rather than by traditional financial metrics such as revenue, free cash flow, or gross margins.
Is QuantumScape worth the risk? Investing in an early-stage company, or a start-up is mostly about maximizing the company's likelihood of success while limiting the risk.
As far as potential, QuantumScape certainly checks most of the boxes: The team that led the SPAC and now leads the merged company reads like a who's-who of technological innovation, industry experience, execution, and investing savvy. The company's product promises much-needed disruption in a young industry with lots of momentum and impressive growth potential. And while revenue is still several years away, the company already has a very large, marquee customer, and is valued at roughly one times 2027 estimated revenue. So, assuming the company hits its projected milestones, its stock has a ton of upside.
As far as limiting risk, however, Fools considering an investment in QuantumScape should probably take a conservative approach, hedge their bets, and avoid putting all of their hard-earned dollars on a small handful of high-risk/high-reward stocks.