Since reaching $132/share in December, QuantumScape (NYSE:QS) stock has tumbled over 60% as hype over the solid-state battery company has died down. Those buying QS stock at the top would have seen a gut-wrenching loss.
But don’t let this post-Christmas sale go to waste. Far from being a disappointment, QuantumScape’s recent drop provides a golden opportunity to buy one of the most promising startups of the decade.
Though its technology will take another 5-6 years to perfect, a successful battery will mean enormous returns for long-term investors in QS stock.
- After falling 50%, QuantumScape stock now looks reasonably priced
- The company has a technological edge over competitors
- Patient investors will see better returns
QS Stock: 50% off Post-Christmas Sale
In early December, QuantumScape, a promising battery maker backed by Bill Gates and others, made an astonishing announcement. After ten years in stealth development, the company had finally made a breakthrough in solid-state battery technology.
The news surprised even me, a relatively cynical tech investor. Like the Golden City of El Dorado, people have been chasing solid-state batteries for years. And most of these promises have ended in disappointment, much like getting a box of Cheerios for Christmas.
Then along came QuantumScape. On Dec. 8, the company released its most promising findings yet. Though its test only used single-layer pouch cells, its batteries demonstrated energy densities of 1,000 Wh/L, twice that of competing batteries. Even better — the batteries could also recharge 80% in just 15 minutes.
Investors immediately jumped in, sending the stock of the newly merged company up almost 100% in a matter of days. However, the fear of missing out soon turned to outright fear as the stock came crashing back down to earth in a reverse-Christmas miracle that could make Charles Dickens shudder.
But as investors say, never let a good crisis go to waste. Even though QuantumScape might correct further in the near-term, its intellectual property looks worth far more than its $20 billion price tag.
Great Technology: The #1 Factor of Tech Companies
Older investors might look at QS stock with an eye-rolling sense of déjà vu. On its surface, the company looks much like Bloom Energy (NYSE:BE), another high-flying energy company that promised to change the world with more than slick investor presentations.
Like QuantumScape, Bloom’s gas-to-power process took a decade in stealth mode to develop. But unfortunately for Bloom Energy, its fuel cells never reached commercial scale. Customers found its cells far too expensive.
QuantumScape fortunately follows a more traditional route. Rather than creating entirely new technology, the firm instead takes existing lithium-ion battery designs and replaces sections with solid-state parts. Even though each of these components still needs massive R&D to perfect, it’s still a safer way to achieve success. Other development companies, from ASML (NASDAQ:ASML) in semiconductors to IPG Photonics (NASDAQ:IPGP) in lasers, have used the same step-change principle to make shareholders rich.
QuantumScape also has the benefit of time. The company already has $1.5 billion in committed capital and can tap equity markets for far more.
But Don’t Hold Your Breath
In a year where even marginal tech companies saw thousand-percent returns, it’s tempting to buy QS stock and options in hopes of easy money. That might still happen. But don’t think of QS stock as a scratch-off lottery ticket.
That’s because QuantumScape will take at least 5-6 years to perfect their technology. Its initial results showed marvelous promise. But it was only achieved in a lab, using a single-layer prototype at 3.4 times atmospheric pressure. In other words, they were perfect conditions. That means three technological hurdles remain:
- Commercial scale. The simplicity of the test means QS still needs to commercialize its product. That means developing multilayer pouch cells, dealing with atmospheric pressure, and managing the expansion/contraction of battery packs, according to Brian Morin at the Soteria Battery Innovation Group.
- Safety. Even though QS claims its ceramic solid-state separator is nonflammable, the lithium metal used in its batteries certainly is.
- Cost. Traditional lithium-ion batteries took over a decade for manufacturing costs to drop 90%. Solid-state technology could take just as long.
To his credit, CEO Jagdeep Singh has urged patience. The company won’t start generating revenues until at least 2024 and cash flow until 2027. And that’s if R&D development goes to plan, which of course never happens.
What’s QuantumScape Worth?
That’s not all bad news. To start, QuantumScape’s solid-state batteries will likely power smartphones and other portable electronics. High-cost, compact batteries are far more useful in settings where every ounce and inch matters. But once they reach that point, automobiles (and perhaps even aviation) will be next. While a smartphone might use one 5,000 mAh solid-state battery, a single sedan could use over 6,000 of them. Assuming a wide-body aircraft like an A340 has a 41,000 gallon jet-fuel capacity, it could use over ten million.
And that means QuantumScape’s market size looks downright gigantic. Analysts estimate that the battery market will grow almost tenfold between 2020 and 2030 thanks to electric vehicle demand. That doesn’t even count potential applications in aviation, rail, power storage, or internet-of-things devices.
That makes QuantumScape’s $20 billion price tag seem quite reasonable. Take BorgWarner (NYSE:BWA) as a comparison. The company, which produces turbochargers for passenger cars, is currently worth $10 billion. Even though BorgWarner has a technological advantage over competitors, the difference isn’t large enough to produce a commanding lead. According to Grandview Research, BorgWarner holds less than 20% of the turbocharger market.
QuantumScape’s batteries, on the other hand, has a massive physical advantage over other batteries. Storing lithium as a solid metal means higher energy density than keeping it in a diluted liquid mush. If the company could bring what it promises to electric vehicles at a reasonable cost, drivers could quickly say “goodbye” to fossil-fuel cars. Even the most dedicated petrol-heads will concede that electric motors have performance advantages over their gasoline-fueled cousins.
So, if QuantumScape succeeds in developing solid-state batteries, it’s not just investors that will win. Cars, aviation, and even F-1 racing may never look the same again.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.