Electric vehicles (EVs) are approaching an industry crossroads. Battery range is arguably the biggest obstacle to EV adoption today, and traditional lithium-ion batteries are potentially topping out.
QuantumScape (QS +1.39%) is racing to solve that problem by developing solid-state batteries, a new technology that allegedly provides superior range, durability, and safety.
Such a breakthrough could make the stock a life-changing investment, possibly turning individual investors into millionaires over the coming years. While recent testing data is promising, the company and its shareholders have a long journey ahead.
What are the odds of success? Here is what you need to know about the potential upside and risks of holding QuantumScape stock.
Data shows QuantumScape's vast potential
The importance of battery technology in electric vehicles is obvious. The battery is arguably the most crucial component of an EV, and QuantumScape is developing solid-state battery technology. What does that mean?
In a lithium-ion battery, lithium ions flow back and forth between a cathode (positive side) and anode (negative side), depending on whether current is flowing out of the battery (powering something) or into it (when charging). Current battery construction constitutes a metal oxide cathode, a graphite anode (in an electrolyte solution), and a polymer separator between the two.
QuantumScape uses a solid-state anode, which means there is no electrolyte solution to receive charged lithium ions. Instead When the battery is charged, lithium metal passes through the separator to the anode side and remains a solid. This design is more energy-dense, meaning it can hold more energy than other batteries its size. That translates to higher ranges for EVs, faster charging, and a simpler production process.
QuantumScape has been developing this with help from Volkswagen, with which it struck a strategic partnership in 2021.
NASDAQ: QS
Key Data Points
PowerCo, a battery company Volkswagen created, has been testing a prototype and recently announced that it had completed 1,000 successful charging cycles. It said the battery still had 95% capacity at the end of its testing.
PowerCo noted that for an EV with a range between 310 to 370 miles, that would be a lifetime range of over 300,000 miles with almost no loss of charging capacity.
Earlier this year, Tesla had touted that its Models S and X would lose 12% of capacity on average after traveling 200,000 miles. You can see how much of an improvement a solid-state battery would be on existing technology and how it would potentially accelerate EV adoption, especially in areas where charging networks are not as accessible.
What's next for the company?
QuantumScape is straddling between the testing stages and getting ready for production. Simultaneous investments are going on in research and development, and with installing machines to manufacture the finished product.
That has created a steady cash burn in the business, totaling $354 million over the past year. Fortunately, there is $1.1 billion in cash on its balance sheet, which management says will fund operations into 2026.
Translating QuantumScape's current position to future investment returns can be tricky because a lot is going on, and a lot can still go wrong as the company prepares to commercialize its batteries.
Here are some concerns investors should monitor:
Competition
EV batteries are a huge opportunity, but that also has attracted a lot of competition. For example, Toyota and Nissan are developing their own solid-state technology. Both believe they can launch solid-state battery EVs by around 2028. Will Volkswagen's tie-up with QuantumScape discourage other brands from buying their batteries?
Of course, QuantumScape could enjoy a first-mover advantage and have enough leverage to force other automotive brands to play ball, but it's a potentially messy landscape that will only settle in time.
Cash losses
As many manufacturers have experienced, growing production to high volumes is expensive. Factories cost a lot, so QuantumScape's cash losses could worsen before the company starts making money. If so, management might need to raise more cash sooner than expected.
Shareholder dilution
QuantumScape is leaning on investors to raise the cash for its business. That's normal, and taking on debt probably wouldn't be wise for a company without revenue.
Still, dilution is dilution, and more shares mean that the intrinsic value of each share deteriorates. In other words, each share represents a smaller portion of QuantumScape, which ultimately eats away at investment returns.
The number of outstanding shares has risen over 40% since the company went public a few years back.
QS shares outstanding data by YCharts.
Investors should monitor how many shares are issued in the future. Dilution comes not only from issuing shares to raise cash but also from stock-based compensation. Over the past year, nearly $162 million has been doled out to employees.
How likely is QuantumScape to be a millionaire maker?
Simply put, a great product doesn't guarantee an excellent investment. At a market cap of over $3 billion already, QuantumScape stock has already begun pricing in success that hasn't yet happened.
Assuming it does get production up and running over the next several years, investors still don't know what the profit margins will look like, how well management will guide the company through this growth, or what competition will look like years from now.
There are far more questions than answers, even if the technology has much potential. Investors can feel free to take a shot at the stock, but they should treat QuantumScape as a speculative investment and only own shares as part of a diversified portfolio.
If QuantumScape knocks it out of the park, you might not need a ton of stock to make a lot of money from your investment.
