Follow the market -- even casually -- and you've probably recognized that interest in electric vehicles (EVs) has soared in recent months. And it's not just the wild upswings in the related stocks that's gained attention in the media. From news that Apple is possibly building its own EV, to a tweet from Secretary of Transportation nominee Pete Buttigieg that "we must put millions of new electric vehicles on America's roads," EVs are frequently in the headlines.
The usual EV stock suspects aren't the only ones on investors' radars. QuantumScape (NYSE:QS), a company focused on developing cutting-edge batteries for EVs, is also attracting attention, and since the best investors are well-informed investors, let dig in and better acquaint ourselves with the company.
1. A brief history of this breakthrough battery business
In 2020 -- otherwise known as the Year of the SPAC -- investors found themselves with a variety of options that transcended one of the most familiar names in the EV industry, Tesla. And for those who were overwhelmed by the flurry of new companies on the scene, QuantumScape was a breath of fresh air as it hit the public markets after its reverse merger with Kensington Acquisition Corp. in November.
The company's history, however, is much longer than the few weeks during which the stock has been available to investors. QuantumScape's current CEO, Jagdeep Singh, co-founded the company back in 2010. If Singh's name rings a bell, it's likely that you also have an interest in the networking industry. Before helping to build QuantumScape, Singh founded and served as the CEO of Infinera from 2001 to 2009.
2. On the road to reporting revenue
While the company's history spans a decade, it will be a few more years until QuantumScape expects to start reporting anything on its top line. In fact, the company is targeting commercial production of its batteries to begin in 2024. However, investors will have plenty to watch before then. For example, QuantumScape, in partnership with Volkswagen, expects to begin construction of a 1-gigawatt hour (GWh) pilot facility in 2021. If successful, QuantumScape will expand the project to a 20-GWh facility. To put this in perspective, consider that in mid-2018 Tesla reported that battery production of its Gigafactory in Nevada achieved annualized battery production of about 20 GWh.
3. Looking farther down the road... to profits
Although generating sales will be an important step in QuantumScape's growth, shareholders are certainly curious about when they can expect the company to report earnings. According to a recent corporate presentation, investors won't have to wait too long. QuantumScape revealed that it anticipates a modest gross profit in 2024 and 2025; shortly thereafter, investors can expect things to ramp up significantly.
While management foresees the company reporting $275 million in revenue and $73 million in gross profit for 2026, QuantumScape estimates that the following year, the top line and gross profit will skyrocket to $3 billion and $1 billion, respectively. Likewise, the company believes that 2027 will be the year it starts to report positive EBITDA -- approximately $808 million.
4. What's the relationship status?
Over the past month, QuantumScape has drawn considerable interest from investors and the media, but one company that has been acutely focused on it for years is Volkswagen. Since 2012, Volkswagen has provided more than $300 million in funding to QuantumScape, making it the company's largest investor -- though it maintains a minority stake. In 2018, Volkswagen and QuantumScape formed a 50/50 joint venture, one of the goals of which is to produce solid-state batteries for Volkswagen's EVs on a mass scale.
Thanks to the joint venture and pilot facility, QuantumScape envisions that Volkswagen will be the first to commercialize its solid-state batteries. But QuantumScape demonstrated in a recent filing that its dance card is hardly full, stating that "subject to the other terms of the joint venture arrangements, we are not limited from working in parallel with other automotive OEMs to commercialize our technology."
5. Broadening its horizons
While QuantumScape is singularly focused on developing its solid-state batteries for EVs, the company recognizes that its technology may be used in other applications, such as stationary storage, smartphones, and wearables. While the company may, in time, pursue the latter two markets, it seems that stationary storage is closest to the company's current focus; moreover, it's one that certainly represents a significant opportunity. According to Lux Research, the stationary storage market, which represented installations of 164 GWh in 2019, is expected to grow at a 20% compound annual growth rate through 2035, when it will reach installations totaling 3,046 GWh.
Summing up this solid-state battery stock
Undoubtedly, there's a lot of potential associated with QuantumScape -- a business that contends it can disrupt conventional lithium-ion batteries. Recognizing this potential, investors have driven shares up more than 420% over the past month. But growth investors should take a breath before picking up shares. Skeptics argue that there are significant hurdles standing in the way of mass production of solid-state batteries. Until QuantumScape proves that it can overcome these challenges, only growth investors with an ample tolerance for risk should consider initiating a position.