QuantumScape (QS 5.69%), a developer of solid-state batteries, went public by merging with a special purpose acquisition company (SPAC) on Nov. 27, 2020. Its stock started trading at $24.80 and rallied to a record high of $131.67 on Dec. 22.
But today QuantumScape's stock trades at just $7. A $2,000 investment in the stock on the first day would have briefly blossomed to over $10,600 before withering to about $560 today. Let's see why the bulls initially fell in love with QuantumScape, why they retreated, and if the stock has a shot at revisiting its all-time highs.
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Why did QuantumScape's stock skyrocket in 2020?
QuantumScape develops solid-state batteries powered by solid electrolytes instead of the volatile liquid electrolytes used in lithium-ion batteries. That difference makes solid-state batteries more tolerant of higher temperatures and less prone to fires.
Solid-state batteries are already widely used in pacemakers, wearable devices, and small radio-frequency identification (RFID) products, but they haven't replaced lithium-ion batteries in smartphones or electric vehicles (EVs) because they're less durable, less dense, and more expensive.
QuantumScape wants to close that gap by developing a new generation of solid-state batteries that can replace lithium-ion batteries in EVs. It's already developing a solid-state battery that could revolutionize the EV market with a range of 650 km and a charge time of just 15 minutes. Its top investor is the auto giant Volkswagen, which started working with the battery maker more than a decade ago.
QuantumScape's plans sound promising, but it hasn't commercialized any products yet. During its pre-merger presentation, it claimed it could start commercializing its products in 2024 and grow its revenue at a compound annual growth rate of 363% from $14 million in 2024 to $6.44 billion in 2028. It also declared its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) would turn positive by 2027.
Those bullish estimates attracted a stampede of bulls, and its market cap peaked at $47.8 billion in late 2020 even though it hadn't generated any revenue yet. The buying frenzy in growth and meme stocks amplified those gains.
Why did QuantumScape's stock drop over the following three years?
QuantumScape's stock subsequently plunged 95%, for three reasons. First, rising rates drove investors away from speculative pre-revenue companies. Second, the broader EV market cooled off and clipped the wings off a lot of high-flying EV stocks.
Lastly, QuantumScape lost more money than it originally anticipated. Back in its pre-merger presentation, it predicted it would post adjusted EBITDA losses of $102 million in 2022 and $114 million in 2023. But in reality, it posted an adjusted EBITDA loss of $249 million in 2022 -- and analysts expect an even wider loss of $280 million in 2023.
It also expected to generate a negative free cash flow (FCF) of $137 million in 2022 and $169 million in 2023. But it actually posted a negative FCF of $377 million in 2022, and analysts expect a negative FCF of $314 million in 2023.
Could QuantumScape's stock revisit its all-time highs?
On the bright side, QuantumScape still ended its latest quarter with $1.13 billion in cash, cash equivalents, and marketable securities, while its low debt-to-equity ratio of 0.1 gives it ample room to raise fresh cash. The company also says it's still on track to start shipping its first low-volume samples in 2024 and high-volume samples in 2025.
For now, analysts expect QuantumScape's revenue to only reach $2 million in 2024 and $15 million in 2025. Based on its current enterprise value of $2.54 billion, its stock still looks ridiculously expensive at 169 times its 2025 sales. But if it can successfully ramp up its production over the next few years, it could potentially grow into its high valuations.
That said, I don't think QuantumScape will revisit its all-time highs anytime soon. Its rally in late 2020 was largely driven by the stimulus-induced buying frenzy in meme stocks instead of the underlying value of its business. It's still a speculative stock at these levels -- but it could be a potential multibagger over the next few decades if it proves the bears wrong.
