QuantumScape (QS 5.69%) was one of the hottest electric vehicle (EV) stocks of 2020. The maker of solid-state batteries went public by merging with a special purpose acquisition company (SPAC) on Nov. 27, 2020, and its stock opened at $24.80 on its first trading day before skyrocketing to an all-time high of $131.67 on Dec. 22.
But today, QuantumScape trades 95% below that level at about $7 per share. Let's see why its stock crashed -- and why you might regret not buying this dip.
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An early-mover advantage in solid-state batteries
QuantumScape initially impressed the bulls with its plans to disrupt the existing market of lithium-ion batteries with its solid-state batteries. Solid-state batteries generate power from solid electrolytes instead of the volatile liquid electrolytes in lithium-ion batteries, which makes them more tolerant of higher temperatures and less susceptible to fires.
Solid-state batteries already power pacemakers, wearable devices, and radio-frequency identification (RFID) products, but they haven't replaced lithium-ion batteries in EVs because they're more expensive to produce.
QuantumScape has been developing solid-state batteries over the past 13 years, but it hasn't commercialized any of its products yet. However, its work caught the attention of Volkswagen, which became the company's largest investor. Last year, the company started producing a solid-state battery that could potentially revolutionize the EV market with a range of 650 km and a charge time of just 15 minutes.
In its pre-merger presentation, QuantumScape predicted it would start commercializing its products in 2024 and grow its revenue at a whopping compound annual growth rate of 363% from $14 million in 2024 to $6.44 billion in 2028. It also aimed to expand its gross margin from 1% in 2024 to 30% in 2028, and declared its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) would turn positive in 2027.
Those lofty estimates drove its market cap to a peak of $47.8 billion in late 2020 -- even though it didn't generate any revenue yet. That speculative valuation made it an easy target for the bears as interest rates rose over the past year.
An ambitious roadmap and plenty of liquidity
QuantumScape currently has a market cap of $3.4 billion, which might seem absurdly high at 243 times its projected sales for 2024. But looking further ahead, it looks a bit reasonable at just over 1 times its estimated sales of $3.2 billion in 2027.
Without any revenue, we can only focus on QuantumScape's roadmap for the future and its financial discipline. According to its latest investor presentation in August, it plans to start shipping low-volume samples in 2024 and high-volume samples in 2025. But it didn't reiterate or update its pre-merger revenue or adjusted EBITDA estimates.
As for its financial health, its operating loss widened from $81 million in 2020 to $215 million in 2021, then widened again to $421 million in 2022. Analysts anticipate even wider operating losses of $472 million in 2023 and $474 million in 2024.
QuantumScape will continue to burn cash as its ramps up its production, but it won't go bankrupt anytime soon. It ended its latest quarter with $1.13 billion in cash, cash equivalents, and marketable securities, and its low debt-to-equity ratio of 0.1 still gives it plenty of room to raise fresh cash. That's probably why its insiders bought 64% more shares than they sold over the past 12 months -- even as its stock stayed nearly flat.
Why it could be the right time to buy QuantumScape
The bears might argue that QuantumScape is just another pre-revenue start-up that capitalized on the boom in SPAC-backed EV listings to generate some fresh cash. That might be true, but its stock could still have a lot of upside potential if it successfully ramps up its production of solid-state batteries.
