The race to build next-generation batteries is the most exciting space in the energy and industrial manufacturing industry today. The transition to EVs and the electrification of everything means that the market for batteries could grow 23% annually for the rest of the decade. While current lithium-ion technology has made huge strides in making electrification and renewable energy more commercially viable products, unlocking the full potential of lithium-based batteries could truly accelerate the industry.

QuantumScape Corporation (QS) is one of the players that has carved out a name for itself in next-generation batteries and was once a Wall Street darling. At its high, QuantumScape's stock (a SPAC) valued the company at over $50 billion. Today, its stock is down more than 90% from its highs, and it is now a $3.5 billion market cap company. Is this lithium battery company poised to make the breakthrough the industry has been waiting for? Let's look at its prospects and whether this lower stock price is worth an investment today. 

What makes QuantumScape unique?

QuantumScape is one of a few companies trying to develop what is known as a lithium metal battery. In current lithium-ion batteries, there is an anode (typically made of graphite, silicon, or some combination) and a cathode (typically lithium combined with other metals) separated by a porous membrane. Things like the thickness of the separator and the energy capacity of the anode are typically the limiting factors in batteries. 

If you can eliminate the need for the anode, though, you can drastically improve the energy density of the battery and reduce the charging cycle time. It is a battery architecture that labs have been working on for decades and has been used in single-use batteries. Rechargeable lithium metal batteries, however, have consistently run into challenges that compromise the long-term integrity and safety of the battery after several charge cycles.

QuantumScape thinks that it has created an anode-free lithium metal battery that can be charged over multiple cycles and maintain integrity. QuantumScape's secret sauce is a precisely manufactured ceramic separator that ensures even charging throughout the cell. In its testing phase, its battery architecture tests have shown the ability to meet many automotive standards, such as energy density and degradation (how much less power it can hold after hundreds of charge and discharge cycles).

These promising lab results have brought automotive manufacturers to the bargaining table like moths to a flame. QuantumScape has received significant backing from Volkswagen AG and so far has signed agreements with three other automotive manufacturers and a stationary energy storage company. These deals will likely be contingent on QuantumScape's battery cells being scaled up to a certain size and then delivering samples for those manufacturers to test independently. So far, the company has reported it has scaled up its testing from a single-layered cell to a 24-layered cell and that testing on the scaled cell has progressed well, according to management.

When the rubber hits the road

Admittedly, the company has made some promising strides in scaling up its testing from a single-layer cell to its current testing regimen. The company also has a huge cash war chest of $1.2 billion from its SPAC deal to see it through from testing and building a manufacturing facility to produce these batteries at scale. 

Remember, though, that QuantumScape is swimming in shark-infested waters here. Billions are being poured into next-generation lithium-ion batteries, and competitors large and small are emerging. Toyota Motors has been working on solid-state batteries for over a decade and has racked up more than 1,000 patents in that sector, Solid Power has signed deals with Ford and BMW and has started pilot production, and even newer entrants are already iterating on the solid-state concept with new separator materials. Even Volkswagen is making investments in other battery companies, so QuantumScape isn't its only investment in the space.

Also, as management has noted in its SEC filings, the manufacture of its patented solid-state separators is still technically in the development phase, and it will likely be extremely challenging to manufacture the material at scale while meeting extremely demanding quality control. That is but one of the many challenges management foresees before developing a commercially viable product and manufacturing it at scale. 

The best of the bunch?

It's incredibly tough to handicap the horse race between all of the players in the next-generation EV battery industry. QuantumScape has shown some promise with its conceptual design and early testing phases. There is no guarantee, however, that it will translate into a commercially viable EV battery, especially on the timeline Wall Street expects. The good news is that there won't necessarily be only one winner here. Automotive manufacturers today are using several battery chemistries and architectures, and that could still hold true as long as QuantumScape and others can meet industry specifications. 

The two big hurdles to watch as an investor are when the company gets results back from the samples it will deliver to manufacturers for independent testing and any updates about codifying its manufacturing process. Those two things need to happen before we can even start estimating its manufacturing capacity and ability to generate revenue. Even with its stock way down from its exuberant high a couple of years ago, there are still a lot of risks associated with this stock because the business outcomes are still so unclear. Any investment in QuantumScape should be viewed as a highly speculative investment and sized in one's portfolio accordingly.