QuantumScape (QS +2.17%), a developer of solid-state lithium-metal batteries, posted its third-quarter report on Oct. 23. It didn't generate any revenue, since it hadn't commercialized any of its products yet. Its net loss widened year over year from $111 million to $120 milion, or $0.23 per share, which matched Wall Street's expectations.
Those numbers weren't surprising, but QuantumScape also said that it had finally "begun producing" the first test samples of its QSE-5 batteries during the quarter. It also said it had "begun shipping" those test cells to its automotive customers.
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These solid-state batteries have an energy density of over 800 Wh/L (watt hours per liter) compared to an average density of 300 Wh/L to 700 Wh/L for traditional lithium-ion batteries, and the ability to be rapidly charged from 10% to 80% in under 15 minutes. The bulls expect QuantumScape to ramp up its production of these batteries to disrupt the lithium-ion market and improve the charging capabilities, range, and safety of electric vehicles (EVs).
QuantumScape's stock climbed higher after that encouraging business update, but it remains more than 95% below its all-time high from December 2020. Should you invest in this speculative company before it successfully scales up its business?
Why did the bulls abandon QuantumScape?
QuantumScape's solid-state lithium-metal batteries generate electricity with solid electrolytes, which are denser, more stable, store more energy, and charge more quickly than the liquid electrolytes used in lithium-ion batteries. Smaller solid-state batteries have already been used in smaller devices like wearables and pacemakers, but they haven't been mass produced for EVs because they're much more expensive than lithium-ion cells.
QuantumScape went public by merging with a special purpose acquisition company (SPAC) nearly four years ago. At the time, it claimed it could generate $14 million in revenue in 2024 as it commercialized its first solid-state batteries, and then grow its revenue at a whopping compound annual growth rate (CAGR) of 363% to $6.44 billion by 2028.
NASDAQ: QS
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Those bold claims raised a lot of eyebrows, but Volkswagen (VWAP.Y 1.40%) was already a major investor and had been co-developing those batteries with the company for more than a decade. Volkswagen had even established a new group, PowerCo, to test and industrialize QuantumScape's batteries in 2022.
Volkswagen's support suggested that QuantumScape had a lot more staying power than many other SPAC-backed start-ups. But it still didn't come close to commercializing its first batteries this year. It also faced more competition from other start-ups, like Blue Solutions and automakers like Toyota (TM 1.27%) and Nio (NIO +1.29%) in the solid-state battery race.
As QuantumScape struggled with its production delays, the EV market cooled off, and rising interest rates highlighted its persistent losses, compressed its valuations, and drove investors away from speculative pre-revenue companies.
Is QuantumScape finally ready to ramp up its production?
For now, QuantumScape will focus on shipping low-volume test samples of the QSE-5 cells to its automotive customers. It says this B-sample phase will "take many months to complete", and that it still needs to "substantially improve on metrics such as cell reliability, yield, and equipment productivity" before it ramps up its production. It also needs to transition to the advanced Cobra separator process, which will succeed its current Raptor separator process, to increase its production volumes. It's trying to achieve that transition by 2025, which means it won't generate meaningful revenues until 2026.
For 2025, analysts expect QuantumScape to generate just $5 million in revenue with a net loss of $461 million. But for 2026, they expect its revenue to more than double to $12 million with a slightly narrower net loss of $459 million. That's assuming it can successfully complete its tests and increase its yields.
QuantumScape is streamlining its spending, and it received some fresh cash by forming a new joint venture with PowerCo this July. It claims those moves will extend its cash runaway through 2028 and give it enough time to scale up its business.
But QuantumScape has also increased its number of outstanding shares by 45% since it closed its SPAC merger, and the company could issue even more shares to raise fresh cash and cover its stock-based compensation. Its insiders have also sold nearly 20 times as many shares as they bought over the past three months.
QuantumScape is still too speculative for my tastes
With an enterprise value of $2.1 billion, QuantumScape is already valued at 174 times its projected revenue for 2026. Any more production delays could drive that ratio even higher as analysts rein in their expectations. It achieved a milestone by shipping its first QSE-5 samples this year, but it hasn't proven its business model is sustainable yet. Therefore, I'd still avoid this speculative stock until it actually shows some more progress toward commercializing its first batteries.
