Aggressive investors are not strangers to making assumptions about a new technology, product, or market. When you combine all of them into one investing decision, things can get complicated.
The electric-vehicle (EV) market is just starting to blossom, but the trend is unmistakable, and the potential is enormous. In the midst of this developing market are the technology choices to power the vehicles. When QuantumScape (QS 1.42%) announced it was pursuing a solid-state battery technology, investors jumped in. But with a high valuation, and a product still several years away, it's worth digging into whether the stock is overpriced, or has potential for huge returns.
QuantumScape's battery laboratory. Image source: QuantumScape.
What makes it valuable
After QuantumScape began trading publicly last November, investor excitement surrounding the solid-state battery technology drove shares up more than 400%, giving the company a market capitalization of about $45 billion. This for a company without commercial products, or even a proven technology for its product. QuantumScape aims to begin production of its battery cells in 2024.
But the technology is one that could revolutionize the EV sector. When you have potential of that caliber in a sector that is already revolutionary, you generate excitement.
Though an oversimplification of the technology, QuantumScape believes it has found a ceramic material that can be used as a solid-state separator in a battery cell that should prevent the formation and growth of lithium dendrites, which can form between the cathode and anode of the battery. Those dendrites can lead to heat buildup and fires, and are the reason that current battery technologies require slow charging times and have performance limitations.
A ceramic solid-state separator. Image source: QuantumScape.
Test results
After the company presented an update on its test results on Dec. 8, QuantumScape stock soared. But it's come down about 65% from the mid-December peak. The testing doesn't yet mean that the technology is commercially viable, but Tim Holme, QuantumScape's co-founder, said in a January article, "We are not aware of any other solid-state efforts that have reported this level of performance under all these conditions simultaneously."
If successful, the benefits would include improvements in battery performance, energy retention, low temperature viability, and safety. In other words, a faster charging battery that could provide longer range with better performance and a longer life cycle than current lithium-ion batteries.
Becoming the battery technology of choice for EVs would be hard to assign a value to in today's marketplace.
It's still a long road
With that said, the testing has only been done with a single-layer cell. Commercial applications will require multilayering, which will significantly add to production requirements and costs. Holme reiterated that the company believes it won't be able to begin volume production until 2024.
There is also competition on parallel paths. French company Bollore (OTC:BOIV.F) has developed a lithium metal polymer solid-state battery being used in electric buses. There are storage-temperature limitations preventing it from being used in personal vehicles, however. Other research is underway as well, and it could compete with, or supplant, even a commercially viable product from QuantumScape.
Investing decisions
Individual investors should always have a diverse portfolio that contains not just a mix of names and sectors, but also different types of investments. A company without a proven technology, but much potential if successful, is squarely a speculative investment.
QuantumScape is notably backed by both Volkswagen (VWAGY 0.90%) and Bill Gates through his clean-energy fund Breakthrough Energy. The German automaker also provides an EV market in waiting for when the batteries are available commercially. That's good, but it doesn't mean it will be a successful investment.
The question of whether QuantumScape stock is overpriced right now is hard to answer. Traditional metrics can't be applied at this early point. The stock is valued at about $17 billion right now. The potential market is enormous, though, and if the path to commercialization is successful, that valuation will look low in five years.
For investors wanting to speculate on that path, and the EV market, QuantumScape is a viable option today.
