EV battery hopeful QuantumScape (QS) recently completed its merger with SPAC company Kensington Capital Acquisition and started trading on the New York stock exchange last Friday. In a shortened trading session after the Thanksgiving holiday, shares were up more than 50% on the day.
QuantumScape is chasing the Holy Grail of lithium battery design, a battery that deposits Lithium directly onto the current collector at the anode and eliminates the need for a layer of graphite.
In most rechargeable lithium-ion batteries, lithium ions are removed from the cathode during charging, travel through a liquid electrolyte and a separator and are intercalated into a thin layer of graphite that is coated onto the current collector at the anode.
Illustration of a typical lithium battery cell – Source
Graphite is used because the lithium ions fit nicely into the spaces between the layers of a graphite crystal allowing the battery to remain dimensionally stable during charge and discharge. However, the graphite anode also places limitations on battery performance. It limits the number of lithium ions that can be collected at the anode thus limiting the energy density of the battery. It also limits the charging rate because of the time taken by those ions to intercalate between the graphite layers. If the battery is charged too fast, or too low a temperature, the lithium will plate on the surface of the graphite forming dendrites. That plating is non-reversible, so the dendrites can grow over a number of fast-charge cycles and can eventually penetrate the separator and short circuit the battery, causing overheating and possible fires.
The solid-state battery under development at QuantumScape has a ceramic separator that allows lithium to pass between the cathode and anode but does not allow dendrites to form at the anode. The graphite layer is eliminated and the lithium deposits directly onto the anode. QuantumScape claims that its batteries will have a higher energy density, faster charging, lower cost, longer life, and will be intrinsically safer than existing lithium-ion batteries.
Source: KCAC analyst presentation
The deal with Kensington and the resulting share ownership
A number of companies this year have chosen to merge with SPACs (special purpose acquisition companies) as a means of expediting their entry into the public markets, saving the time and expense of preparing a prospectus and the cost of issuing shares via a traditional IPO.
The deal with Kensington valued QuantumScape at $3,688 million including $471 million in cash. At a nominal $10/share, this gave the original QuantumScape owners 82.4% of the company. KCAC investors took 23 million shares (for $230m cash) and PIPE investors took another 50 million in exchange for $500 million in cash. Volkswagen (OTCPK:VWAGY), which has been a partner of QuantumScape since 2012, invested $100 million in PIPE shares.
Source: KCAC analyst presentation
The original QuantumScape shares and the PIPE investor shares are subject to lock-up agreements for one year and 180 days respectively. However, the lock-ups can be waived if the shares trade at more than $12 on any 20 days during a 30-day period at least 150 days from the date of the merger. Effectively, this places a 180-day lock-up on the shares provided they trade at more than $12.
The merger valuation resulted in an enterprise value of $3.321 billion ($4.889 billion equity minus $1.155 billion in cash). The company is debt free, has no operating revenue, and its operations have been burning cash at a rate of about $50 million per year. The current cash balance is predicted to be adequate to sustain the operations until the company enters commercial production in 2027.
The enterprise value based on the closing price after the first day of trading is $16.56 billion, an increase of almost 400% versus the implied valuation used in the merger.
SEC rules require that an IPO prospectus focus on the risks attached to the shares but companies using the SPAC route to go public do not have to issue a prospectus. A skimpy and rather one-sided analyst presentation is all the information we get.
QuantumScape’s lithium cell has so far only been tested in a single layer pouch configuration. Development of a multi-layer, multi-cell battery will likely take several years including pilot plant testing before a full-scale plant can be built and put into production.
QuantumScape’s single layer pouch cell Source: KCAC analyst presentation
Development of a multi-layer, multi-cell battery will likely take several years including pilot plant testing before a full-scale plant can be built and put into production. According to the company’s own projections (shown below), it will be seven years before the new battery factory generates positive free cash flow.
Free cash flow projections with and without expansion after the first 20Gwh factory. Source: KCAC analyst presentation
A lot can happen during that time to disrupt those plans.
Billions of dollars are being invested in the development of battery technology for electric vehicles, for example:
- Toyota (NYSE:TM) (in partnership with Panasonic (OTCPK:PCRFY) claims to have developed a solid-state battery that is expected to be in limited production by 2025
- Researchers at Samsung (OTC:SSNLF) also claim to have built a solid-state battery that can be charged quickly
- A partnership between Daimler (OTCPK:DDAIF) and Hydro Quebec is working on solid-state batteries with the aim of production as early as 2026
- General Motors (GM) expects to have its next generation of Ultium batteries in production by the middle of the decade with twice the energy density at less than half the cost of today’s technology
- Talga Resources (OTCPK:TLGRF), a graphite mining and battery technology hopeful claims to have a graphite-based anode that can be charged in 3 minutes
These are just a few of the many companies working on EV battery technology. There is no reason to believe that QuantumScape will be first to market with a fast-charging solid-state battery, or that QuantumScape’s battery will be in any way superior to any of the others.
In their investor presentation, QuantumScape has made value projections of between $32 billion and $57 billion market cap in 2028. It equates to a share price of between $71 and $127 without dilution. However, that valuation is based on a comparison of revenue multiples versus those of other EV and battery companies (Tesla (TSLA), CATL, and Nio (NIO)), there is no guarantee that EV and battery stocks will be trading with those very high revenue multiples in 2028.
There is simply no way to place a value on QuantumScape stock, any investment must be regarded as highly speculative.
Low public float adds to the potential for a bubble valuation
Electric vehicle stocks have reached bubble valuations, many of them are trading at prices that bear no relationship to the company value or prospects. QuantumScape is an ideal candidate to participate in that bubble for as long as it lasts or until the lock-up expires and more shares are released to the market, whichever comes first.
- It is a pure EV play, free of legacy baggage and there are very few similar EV battery companies on the market today
- There is a promise of a new and disruptive technology
- There is potential for big returns, but far in the future
- There is a lot of interest in the sector and any positive announcements can very quickly spread through both conventional and social media to create a buying frenzy
- There are very few shares in the public float, only 5% of the company is currently available to outside investors
- There is speculative interest among traders, with daily trading volume exceeding the entire public float
If you are looking to make a quick dollar on the next hot stock, then you might want to consider QuantumScape, but be aware, you are backing one of several horses in a very competitive race, don’t bet the house on it.
Disclosure: I am/we are long QS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have a very small, speculative position in this stock. It is gamble, not an investment