More than 200 years since the battery was invented, and over 100 years since first being commercialized on a large scale, battery technology is more important than ever. For these big developments taking place, thank the automotive industry (along with some nudging from various governments and organizations around the world, not to mention Tesla's financial success). Automakers are trying to make a pivot from internal combustion engines (ICE) to electric vehicles (EVs) powered by lithium-ion batteries.
But there are big technology problems that still need to be solved that could add fuel to the EV fire (not literally, since an EV fire is no bueno). Enter QuantumScape (QS 5.69%), which continues to plug away at its "battery technology platform" with key automaker partners.
2023 was a wild year for QuantumScape's stock. There are reasons for optimism, but also one big red flag investors need to be mindful of. The thesis surrounding investing in QuantumScape boils down to three primary reasons.
1. QuantumScape is now shipping batteries to automakers
QuantumScape is working on a solid-state lithium-metal battery platform. Lithium-metal is promising, as it is more energy dense, which should theoretically increase the driving range of an EV.
The company's work centers on replacing traditional lithium-ion battery anodes with pure lithium-metal (an anode is the half of a battery that releases electrons and provides electric current during battery discharge). The idea is that other material innovations in the cathode (the receiving half of the battery during discharge, and the half that sends electrons back to the anode during charging) can be paired with QuantumScape's anode and ceramic separator technology (the separator is the material between the anode and cathode) to provide automaker and other manufacturing partners with a higher-performance custom battery setup for their specific needs.
There has been excitement throughout 2023 as the company said it was shipping prototype battery cells (the "A0") to prospective customers for testing. There is one prospective customer engagement that could possibly lead to EV production featuring QuantumScape's first production-ready battery, the QSE-5, though this project is small in scope for now.
2. The company hired an executive with manufacturing experience
Adding further to the belief that QuantumScape is reaching an important inflection point, the company hired Dr. Siva Sivaram over the summer of 2023 to head up tech research and manufacturing. Sivaram has extensive experience in the semiconductor industry, last serving at memory chipmaker Western Digital, and before that as an executive at SanDisk (acquired by Western Digital in 2016).
QuantumScape itself said the hiring was important as it flips from a research and development focus to a battery production focus. Much like semiconductor manufacturing, battery production is a complicated process that would benefit from having someone with extensive experience.
3. The EV market is still growing fast
Of course, there have been media reports in the second half of 2023 about the slowing EV market, which is being throttled by higher interest rates. Higher rates increase the cost of financing, making an expensive new EV model less attractive to consumers.
Despite the bad press about an industry slowdown, though, the EV market is indeed still growing. Top lithium producer Albemarle confirmed as much in its latest financial update, showing that global EV sales remain on pace to increase 40% compared to 2022.
If that's true, it could be good news for QuantumScape. A growing EV market means there could be no shortage of demand for its lithium-metal batteries once they are ready for commercialization.
One reason to sell QuantumScape stock
Setting aside the optimism surrounding this start-up, there's one big reason to view QuantumScape with a healthy dose of skepticism.
This time last year, I said two things needed to happen for QuantumScape stock to sustain a rally. It needed to start realizing revenue and the U.S. Federal Reserve's interest rate hikes needed to start coming down (higher interest rates lower the present value of a company, in addition to making financing more expensive). Neither has happened.
The lack of revenue in particular underscores the fact that QuantumScape is still just a start-up. Because it reports zero revenue, the business racks up significant quarterly losses -- $121 million in operating losses in Q3 2023, and $354 million in operating losses in the first nine months of 2023).
To keep its balance sheet liquid during the R&D phase of its existence, QuantumScape sold more shares this past summer to raise an additional $288 million in cash (it ended Q3 with $1.1 billion in cash and short-term investments and zero debt). However, stock sales dilute ownership for existing shareholders, further amplifying the downward pressure on the stock.
Until QuantumScape starts reporting actual sales, it will be hard to justify a sustained rally higher for the stock price. At this juncture, QuantumScape should still be considered a high-risk and only potentially high-reward investment. At best, for most investors, this stock should merely be part of a diversified basket of EV battery and lithium technology and bets.
