Early investors in electric-vehicle (EV) battery start-up QuantumScape (NYSE: QS) have had quite a ride -- and not the fun kind. The company went public via a merger with a special purpose acquisition company, or SPAC, in late 2020 and quickly zoomed to a valuation of around $54 billion. Investors were excited about the potential of a better EV battery and rushed to buy.
That didn't last, of course. QuantumScape's market cap is now around $3 billion. But despite the stock's swoon, the investment case for the company hasn't changed. Here's what QuantumScape does and why it might be a major player in EV batteries in a few years.
QuantumScape's solid-state batteries could make EV charging quicker and the cars lighter and safer. But the company still has challenges to overcome before its batteries go to market. Image source: Getty Images.
QuantumScape's mission: A better, safer battery for EVs
QuantumScape is working to commercialize "solid-state" batteries because they don't need the flammable gel or liquid electrolyte found in today's lithium-ion batteries.
In theory, solid-state batteries offer big advantages for electric vehicles. A solid-state battery pack can be smaller and lighter than a lithium-ion battery pack of the same capacity. It also can recharge more quickly than existing batteries, and the absence of liquid inside means it's less likely to catch fire.
But despite decades of research, a workable solid-state battery that can be affordably mass-produced has proven elusive. Most efforts have been stymied by dendrites -- needle-like structures that form, penetrate the "separator" between the battery's poles, and short-circuit the battery cell -- often in a matter of weeks.
QuantumScape's key innovation is a battery separator made of a flexible ceramic that can conduct electricity while resisting dendrites. It's worked successfully in early testing, but there's still some distance to go before the company will be able to start shipping batteries at scale -- and there's still a good chance it won't get there.
QuantumScape's battery is coming together, but big challenges remain
Investors should understand that battery development moves very slowly. QuantumScape has been working to develop and commercialize its technology for over a decade, and it's still not quite ready to test its batteries in an electric car.
That point isn't too far off, though. QuantumScape delivered its first "A samples" -- simplified versions of the batteries it eventually intends to produce -- to its automaker clients (including Volkswagen AG, which owns about 15% of QuantumScape) at the end of 2022. Its plan for 2024 is to deliver an improved A sample and begin low-volume production of prototype batteries that are closer to its final product by the end of the year.
A major focus of the company's work this year will be on the processes and equipment needed to build its batteries at scale. Last year, it came up with a quicker and more cost-effective way to make its ceramic separators and is developing another improved process that will be quicker and cheaper still -- assuming, of course, that it works as expected.
QuantumScape currently expects to produce its batteries on a close-to-final assembly line by the end of 2025. Those early batteries will be supplied to the company's automaker clients. In turn, they will evaluate them and, assuming they work as expected, begin developing new vehicles that incorporate them.
The investment case for QuantumScape stock
QuantumScape said last month that its current cash hoard, about $1.07 billion as of the end of 2023, should last into the second half of 2026. If the company can deliver a production-ready battery that delivers as promised before it runs out of cash, it should have no trouble raising money to build and equip a large factory to make the batteries at scale. Revenue and profit will follow.
For investors, QuantumScape is a moonshot: Either it works or it doesn't.
My own take, after following the company for several years and having had a few conversations with founder and chairman Jagdeep Singh, is that QuantumScape has a good chance of getting there -- a better chance, probably, than any other EV battery start-up. The innovation is real and important, and the company is taking the right steps to bring it to market.
As for the stock, it's obviously high risk. Whether it's a buy at any price will depend on your own risk tolerance.
Even at current low prices, you might end up losing most or all of your investment. And even in the best case, you might not see big gains for several more years. But the potential market is a big one, and the rewards could be huge.
Should you invest $1,000 in QuantumScape right now?
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John Rosevear has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Volkswagen Ag. The Motley Fool has a disclosure policy.
