Electric vehicles (EVs) offer a promising glimpse into the future, but the technology still has a way to go before widespread use becomes commonplace. QuantumScape (QS 0.65%) is one company working on battery technology that could push EV technology forward and overcome the limitations of modern lithium-ion battery technology.
QuantumScape recently made headlines when it completed its first round of endurance tests on its solid-state battery cells with positive results. The news was a great sign for the up-and-coming battery technology company. However, does it make it a good investment? Let's dive into the company to see.
NASDAQ: QS
Key Data Points
QuantumScape develops innovative battery technology that could help EVs achieve mainstream appeal
QuantumScape is developing next-generation solid-state lithium-metal batteries for EVs. The company sees fundamental limitations of modern batteries and believes its solid-state technology could eventually lead to batteries with greater energy density, faster charging times, and enhanced safety.
One aspect holding back widespread EV adoption is the range of the vehicles. To compete with traditional internal combustion engines, EVs must have a range of at least 300 miles, QuantumScape tells investors in its annual report. According to The International Energy Agency, the average range of EVs in 2021 was around 217 miles, up significantly from 2011, when the average range was 86 miles. However, it is still far from the median gas car range of 413 miles.
Additionally, to compare with refueling a gasoline-powered engine, the batteries must be fast-charging, meaning they recharge from 10% to 80% in about 15 minutes or less. QuantumScape believes its battery technology could give EVs wider mainstream appeal by solving some of these fundamental issues.
QuantumScape "significantly exceeded the requirements" during a recent test of its battery
One company working closely with QuantumScape is Volkswagen. The German auto manufacturer has invested nearly $300 million in the start-up and formed a 50-50 joint venture to help it achieve industrial-level battery production.
Volkswagen's Power Co. recently completed an endurance test of QuantumScape's solid-state battery, and the results were promising. In a press release, Volkswagen said QuantumScape's "solid-state cell has significantly exceeded the requirements in the A-sample test and successfully completed more than 1,000 charging cycles." It noted that the battery still had 95 percent of its capacity and that "an electric car could drive more than 500,000 kilometers without any noticeable loss of range."
Image source: Getty Images.
The battery maker has its work cut out for it
QuantumScape's battery technology is coming along, but the company also must deal with numerous headwinds. For one, it faces competition from Toyota, which plans to bring its solid-state batteries with up to 745 miles of range to the market as soon as 2027. Chinese automaker Nio has also recently completed a test wherein its semi-solid-state battery traveled over 650 miles on a single charge.
The EV battery maker also faces another problem: It is pre-revenue and won't produce profits for a while. The company posted a net loss of $332 million through nine months last year, up nearly 10% from the previous year.
The company still has a lot of work to do before reaching a commercial scale. It plans to start production in 2024, generating around $14 million in revenue. However, it won't achieve positive earnings before interest, taxes, depreciation, and amortization (EBITDA) until 2027 nor positive free cash flow until a year later, assuming it's able to hit management's target revenue of $6.4 billion in 2028.
QuantumScape has taken moves to ensure it has enough capital to fund its operations. In August, it issued 37.5 million shares of stock for around $300 million and has over $1.1 billion on its balance sheet -- which should provide it with enough money to fund operations through 2026.
QuantumScape: buy, sell, or hold?
QuantumScape is an intriguing company with massive potential in the growing EV space. However, it is the definition of a high-risk, high-reward stock. If you have a long time horizon and don't mind the elevated risk, QuantumScape may be for you. Just don't put in more than you're willing to lose.
However, given the company's current standing, I'd shy away from the stock. Most investors wouldn't benefit from holding it during these early developmental days, and the stock will likely experience much more volatility on its path to reaching a commercial scale.
