Norwegian start-up Freyr Battery (FREY 17.27%) is getting bid up by Wall Street as analysts jump on the lithium-ion battery maker's bandwagon. The bullish sentiment assumes Freyr will cement extensive relationships within the global battery industry across several continents coupled with ambitious production goals. 

Freyr went public in July 2021 after merging with special purpose acquisition company (SPAC) Alussa Energy Acquisition, and its stock has gained 63% over the year since then. Analysts continue to fall over themselves to heap praise on its potential, with Morgan Stanley just issuing an investor note that looks for the battery maker to turn into "a real player in the global battery economy later this decade."

While there is also a bear case made for Freyr to short circuit, no analyst is predicting that at the moment -- the start-up has a near unanimous buy recommendation assigned to it. That said, investors may want to be more circumspect than their Wall Street counterparts about the EV battery stock for the following four reasons.

Technician in battery production plant.

Image source: Freyr Battery.

1. It's still a start-up

Freyr has yet to put its battery technology into service because it is not yet in production. In fact, it doesn't even have a factory built yet. While it has commenced construction of its first Giga Arctic battery production facility near the Arctic Circle in Norway, with additional facilities planned for Finland and the U.S., the inaugural plant is not scheduled to open until sometime in the first half of 2024.

It does, however, have a customer qualification plant (CQP) scheduled to come online by the end of the year. The CQP will be a demonstration production line that is the same size as a regular commercial production line, but its purpose is to create samples for Freyr's customers and test different materials.

2. A crowded market

The production goals that have analysts salivating include delivery of up to 43 gigawatt hours (GWh) of battery cell capacity by 2025, more than 83 GWh of annual capacity by 2028, and over 200 GWh of annual capacity by 2030.

To put that in perspective, Panasonic (PCRFY), which builds batteries for Tesla (TSLA 3.17%), recently expanded its Nevada production capacity to 39 GWh, and will increase it another 10% by 2024. It wants to triple its capacity by 2028.

But the market is big and growing, and others plan to dramatically expand capacity, too. China's Contemporary Amperex Technology is the world's largest battery maker (it also produces batteries for Tesla) and is expected to have production capacity of 1,337 GWh by 2030, according to Goldman Sachs. It's forecast Tesla will have 970 GWh, BYD will have 636 GWh, followed by Toyota at 280 GWh.

Freyr's battery manufacturing processes are using technology from 24M, a small privately held company itself that was founded as a spin-off from the Massachusetts Institute of Technology. Its technology seeks to deliver higher energy density per battery while enabling significant reductions in capital and operating costs, as well as carbon content.

Freyr's agreement with 24M gives it the right to unlimited production of battery cells based both on 24M's existing technology as well as future developments. Yet the competition is looking toward the future as well.

Panasonic is looking to create greater-density batteries to increase EV driving range, while others are pursuing technologies that allow for faster charging and increase longevity, and are less expensive. Tesla is looking at the potential for a new battery that would last 100 years with little degradation and run for 4 million miles.

3. Sole-source supplier risk

According to Freyr, 24M's technology significantly streamlines the battery cell manufacturing process compared to conventional technology. It also reduces the energy input costs while lowering CO2 emissions.  The license requires Freyr to pay 24M $20 million for the rights to produce battery cells based on its proprietary technology, and then an ongoing royalty on future sales. While a supposedly revolutionary new technology that allows for faster, cheaper production, Freyr still needs to be able to do it at scale. 

Because the technology is not its own, Freyr says its business, competitive advantages, and financial results are heavily dependent upon 24M so should it relationship with 24M sour, its ability to ramp up deployment of factories and production could be undermined. It might not be fatal, but it would impair the efficient operation of its battery manufacturing. 

Moreover, 24M has the right to walk away from the deal if Freyr fails to live up to production goals, and if 24M is unable or unwilling to meet certain financial obligations required of it, Freyr may be burdened with the cost.

These kinds of transactions are not unique, and often don't melt down, but it's a risk investors need to be aware of because of the ramifications for Freyr if it does find itself in that situation.

Caution ahead

Freyr is obviously not generating any revenue at the moment, while its operating losses are growing. It reported a $31.5 million loss at the end of the second quarter, up from $27.6 million in the first and some $10 million a year ago. Now that the lithium ion battery maker is in the construction phase of its factories, which will cost around $1 billion to build, those losses may quickly escalate.

The EV battery maker does have financial support from the Norwegian government and others to help finance the costs of the plants, but it could be a long time before it turns profitable -- assuming it does. Although it looks like Freyr Battery has a bright future, it doesn't seem like it could capture the public's imagination as Tesla has and grow its size and valuation to a similar degree.

Because a lot of the upside potential of Freyr Battery seems to have already been priced into the stock, investors would be wise to proceed with caution.