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Is QuantumScape Stock Too Risky?

By Scott Levine - May 1, 2021 at 8:02AM

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Management is supercharged about the company's prospects; bears are balking at the bevy of risks, though.

Finding a solid dividend stock or a quality stock at a rock-bottom price are attractive propositions for investors. But they pale in comparison to the thought of picking up shares of a growth stock before it skyrockets. This prospect is the case regarding QuantumScape (QS -2.50%), a company that believes its innovative approach to battery technology represents a game-changing solution for the electric vehicle (EV) industry.

The only sure thing in the world of investing, though, is that there's no such thing as a sure thing. QuantumScape has the potential to revolutionize EVs, and, if it does, the company's stock will undoubtedly soar

A calculator and glasses surround a risk chart.

Image source: Getty Images.

What's electrifying the bulls?

Almost every day another sign seems to emerge announcing the arrival of the EV revolution. This week, for example, the New York State legislature passed a bill (which the governor is expected to sign) that would ban the sale of non-zero-emission cars in the Empire State in 2035 and beyond. With so much enthusiasm for EVs, it's no wonder that QuantumScape is on investors' radars.

Seeking to disrupt the EV industry, the company is developing a lithium-metal solid-state battery, with a superior energy density and longer life than traditional lithium batteries. QuantumScape contends that its solid-state batteries are capable of fast charging from 0% to 80% in less than 15 minutes.

While the company's technology is certainly exciting, it's more likely that it's the company's financial projections that really have investors champing at the bit. QuantumScape expects to first generate significant revenue -- about $14 million -- in 2024 and then soar to $6.4 billion in 2028. And it's not only sales where the company sees growth; it estimates that it will report negative EBITDA until 2027, when it will generate $808 million, rising to $1.6 billion in 2028.

The potential perils in production

While QuantumScape's management is confident that it can bring the company's solid-state batteries to market, skepticism remains high -- especially since no company has been able to surmount the manufacturing challenges and scale up production of solid-state batteries.

In a 2018 report on EVs, for example, Citi Group identified a variety of issues that represent obstacles for commercialization of solid-state batteries -- "reducing interface resistance between electrodes and solid electrolytes, cell development process, establishing a battery pack structure, [and] developing low-cost mass production technology."

Illustrating the formidable challenges that companies face, Fisker, an EV start-up company that had expressed interest in developing the innovative batteries, announced in March that it was forsaking the endeavor completely "at this point in time because we just don't see it materializing."

Perhaps the most acute critique of QuantumScape, however, came from Scorpion Capital's cutting report on the company. Comparing QuantumScape to Theranos, Scorpion Capital cites a number of former employees who contend that the company is misleading in its claims that it's making steady progress in bringing the solid-state batteries to market.

Whereas QuantumScape stated in a recent letter to shareholders that it expects its production facility "to have a continuous flow, high automation line capable of building over 100,000 engineering cell samples per year," the Scorpion Capital report references a former employee who casts doubt on the scalability, stating that employees "built 300 cells a day, and a few of them were OK to test."

It's important to note, however, that QuantumScape has reported successes in its drive to produce the batteries. The company announced in early April that it met a milestone in the testing of its lithium-metal cells in Germany. Prior to this feat, QuantumScape had reported successful testing of its multiple-layer cells. 

The risk recap

There's no doubt that an investment in QuantumScape entails considerable risk. It's not only that uncertainty surrounds QuantumScape regarding its ability to commercialize solid-state batteries -- no other company has succeeded in this regard as well. With regards to the critical report from Scorpion Capital, it's important for investors to recognize that it held a short position in the stock at the time of the report's release; thus, it had a vested interest in seeing the stock slide.

Considering the production milestones that the company has achieved recently, the risk surrounding an investment is not as large as it was when the stock hit the public markets last November. But this stock is not for the faint of heart; it represents a considerable degree of risk. Only those investors with ample threshold for risk, therefore, should consider carving out a position in their portfolios for it. 

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Stocks Mentioned

QuantumScape Corporation Stock Quote
QuantumScape Corporation
QS
$8.59 (-2.50%) $0.22
Fisker, Inc. Stock Quote
Fisker, Inc.
FSR
$8.57 (0.00%) $0.00

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