One of the most important factors in successful investments is finding management with goals and incentives that align with the company and investors. When companies grow, often those alignments can be forgotten or lost in the shuffle by investors.
QuantumScape (QS +4.52%) has the capability to upend the current state of batteries powering electric vehicles, and its management has strong incentives toward company objectives as well as a lofty $300 stock price target. Here's how it works.
Incentives 101
Let's get into the nitty gritty and see exactly what incentives management has. At the end of 2021, QuantumScape granted stock options to the company's CEO and other members of the management team, according to its Extraordinary Performance Award (EPA) program. The program consists of five equal tranches that vest if the company meets certain business milestones and stock price targets.
Here's a look at the milestones:
- Delivery of an A-sample battery cell that meets specifications agreed upon with an automaker
- The validation by an automaker of a completed B-sample battery cell (a B-sample battery cell is a functional, complete battery cell prototype produced from the pre-pilot or sample production line)
- Delivery of at least 1 gigawatt hour (GWh) of battery cells to a single customer
- Delivery of at least 3 GWh of battery cells to each of three or more customers, with at least one customer being an automaker
- $5 billion in generally accepted accounting principles (GAAP) revenue over a period of trailing four quarters
- $10 billion in GAAP revenue over a period of trailing four quarters
- Total cumulative battery cell production of 500 GWh
- Total cumulative battery cell production of 1,000 GWh
- Adjusted EBITDA margin of at least 25% over four consecutive quarters
- 10% of worldwide market share in automotive battery cells (excluding China)
- 20% of worldwide market share in automotive battery cells (excluding China)
Note that most of the milestones are long-term oriented, which should align with long-term investors, especially considering the company is still pre-revenue and working on prototype samples.
Once each milestone is met it's considered achieved, even if the metric dips below the threshold afterward. But the stock price must be sustained and is assessed by using the 120-day trailing average closing price.
But what are those stock price targets and how do they mix with milestones?
To the moon
The five stock price targets of the EPA program's five tranches are $60, $120, $180, $240, and $300. The first tranche would be one milestone completed and a stock price target of $60, and tranche five would be five milestones achieved with a stock price target of $300.
These stock price targets might seem crazy considering the stock currently trades at a paltry $7 per share. But the potential of this company alone could send the stock price soaring once the technology is proven at high-quality production standards.
NASDAQ: QS
Key Data Points
Where is QuantumScape at?
At the end of 2022, QuantumScape shipped its first A0 prototype cells to potential customers with the mission of providing a proof-of-concept of a solid-state lithium-metal battery cell that meets the specifications for most automakers.
While the company was able to cherry pick its best result, it announced during the third quarter that its top-performing prototype cell in one customer's test achieved over 1,000 full-cycle equivalents with over 95% discharge energy retention -- favorable to the 800 cycle and 80% retention target that automakers seek.
To love, or not to love
It's easy to envision a scenario where QuantumScape completes its prototype samples and through its deep joint venture with Volkswagen begins delivering batteries. This could send its stock price through the roof for the first tranche.
To be clear, QuantumScape is years away from delivering a commercial product at high volumes and still has a long way to go toward proving its technology can meet the quality standards required for such production. Keep in mind it's trying to introduce groundbreaking solid-state technology that can remove the anode bill of materials while also extending the electric vehicle range and reducing charge time.
But these incentives should encourage investors that management's sights are on long-term industry-changing targets, and completing even a couple of these early milestones could cause the stock to pop quickly. QuantumScape is the true definition of a high-risk and high-reward stock, and potential investors should be deep-diving on all aspects of the company, including management incentives.
