Why is QuantumScape Up 63% This Week?

QuantumScape (QS) shares are up 63% this week. The major catalyst for this rally was positive performance data for its latest battery which shows that they are capable of working at a high rate of power and being 80% charged within 15 minutes.

This is faster than conventional batteries. It also has positive implications for the EV sector as it implies that electric cars could reach their “crossover point” sooner than the consensus expectations. The crossover point is the date at which electric cars become cheaper and have more range than a gas-powered car.

So far, batteries have proven to be the most challenging part of the EV equation in terms of them being the heaviest, costliest, and the component with the most safety risks. Additionally, there are concerns that the sourcing of raw materials and disposal of batteries adds to environmental degradation which is the very solution that EVs are supposed to solve.  

Therefore, QuantumScape’s batteries are a meaningful breakthrough. More powerful batteries mean that less would need to be produced. They also will boost demand for EVs through their additional range and faster-charging speeds which in the long-term would result in falling costs. The company also claims that its batteries can operate in any environment and last for thousands of miles. 

Company Background

QS was founded in 2010 by Jagdeep Singh and Stanford professor Fritz Prinz. It recently went public through a SPAC with Kensington Capital in September. The stock is 360% higher since the merger was announced.

The company is headquartered in San Jose. Early investors include several high-profile names such as Volkswagen, Bill Gates, LightSpeed Partners, Khosla Ventures, and Kleiner Perkins. Volkswagen is the largest investor in the company. Two Volkswagen senior employees are on the Board of Directors as well as luminaries like JB Straubel, the co-founder of Tesla (TSLA), and John Doerr, a legendary VC.

Since 2012, the company has had a close working relationship with Volkswagen. The German automaker has invested $100 million into the company in 2018 and added another $200 million to its investment before the reverse merger. QS is expected to use proceeds from the SPAC to build production facilities for its solid-state batteries with Volkswagen being its major customer. 

EV Mania

For much of this year, EV stocks have been one of the best-performing groups. Interest in the sector grew as leading companies like NIO (NIO) and TSLA started delivering impressive returns for investors. Now, the mania has spread into a variety of adjacent sectors like charging stations, lithium miners, auto component stocks, and battery stocks. 

The long-term picture for the EV sector is promising as it’s expected to become the dominant form of transportation by 2050. Analysts are projecting that by 2030, around 30 million EVs will be sold, globally, which is a sharp increase from less than 2 million in 2019. 

For automakers to meet this demand, there are two primary challenges - electric powertrains and batteries. The latter has proven to be the more difficult and costly endeavor. Additionally, it’s outside of the wheelhouse for most car companies.

Some companies, like TSLA, are developing an in-house solution. TSLA is building a vertical solution that involves buying mines for rare metals and then producing their batteries at their Gigafactories. 

This path comes with its difficulties as it’s technically challenging and involves multiple points of failure. Most car companies will look to outsource battery development and manufacturing. The early indications from QS’s results are promising and indicate that it has a good opportunity to win market share in this nascent, growing market.   

What’s Next?

QS’ batteries represent the next generation and are considered an upgrade over lithium-ion batteries since they charge faster and are safer. There’s a lot to like about the stock. Whichever company can solve the battery issue has a potential, multi trillion-dollar opportunity in the coming decades.

Cheaper and more effective batteries will have positive impacts on the EV market as well as other industries like alternative energy. The cost of energy storage is the major constraint on more investment in wind and solar energy. QS’s breakthrough will make these technologies more potent and ubiquitous.

In terms of QS’s stock price, it’s a similar situation to many of the higher-quality EV stocks. The long-term upside is intriguing, however, there are significant, valuation risks given its $15 billion market cap. Additionally, the company is projecting that it will begin manufacturing batteries at scale in 2025. This means that there will be no significant revenue till then. 

Want More Great Investing Ideas?

USO shares were trading at $32.02 per share on Thursday morning, up $0.68 (+2.17%). Year-to-date, USO has declined -68.75%, versus a 15.39% rise in the benchmark S&P 500 index during the same period.

QS shares were trading at $73.52 per share on Thursday morning, down $1.62 (-2.16%). Year-to-date, QS has gained 642.63%, versus a 15.88% rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.

More...