After over 90% Erosion In Value, QuantumScape Future Has Many Possibilities

Wall Street has been ominous for most stocks in 2022, more so on smaller, unprofitable growing companies which are typically more sensitive to rising rates, inflation and supply chain challenges. The same has been the case with QuantumScape (QS) investors. QS stock is losing money and there are no product revenues. It is a special-purpose acquisition company (SPAC).

QuantumSape’s next-gen, solid-state battery technology still is a work in progress, though it is moving towards fruition. InvestorPlace’s Luke Lango believes this past quarter’s 16-layer testing puts the company on a trajectory to launch workable battery samples by the end of 2023 or by the end of 2022 itself.

Recent run of QS Stock

Even the S&P 500 was down by 9 per cent as the technology and growth stocks were particularly hard hit in April 2022. Being still just speculative, without a commercial product, QS was one of those companies. Although it told investors that it remains on track with its technology development, its shares declined more than the market, plunging 25.3% for the month of April, signalling a drop in investors’ sentiments.

The trend continued in May as QuantumScape shares lost another 14.4% during the month. QS stocks lost about 47% in value year to date.

Why Are the Stocks Falling?

QS is a pre-revenue technology company, developing new, solid-state battery technology for the electric-vehicle industry. Thus, much of its value is based solely on potential and relative progress. Hence, the investors aren’t willing to hold the riskiest investments through the down cycle, bringing down the QS shares. Further, several business leaders like Elon Musk and JPMorgan Chase’s Jamie Dimon hinted toward a severe economic downturn or recession to come. Thus, investors are sceptical about money invested in a speculative stock as the timeline for potential commercialization is still at least a year away. Answering to the worries, QuantumScape provided guidance to investors in April.

QuantumScape’s Guidance to Investors

Announcing on April 26, 2022, QuantumScape told the investors that it is on track with its technology development. The company may increase safety, efficiency, and performance, bettering the existing EV battery technologies. The firm noted that it hopes to begin producing samples on a pre-pilot production line in 2023, and has also assured that the company has been making progress on the technological development.

On positive note, the technology helped the battery cells retain energy through enough 15-minute fast-charging cycles for an EV. It promises a battery range of 400 miles to get 160,000 total miles of driving. Playing down the worries of its investors, it has produced results showing the technology can successfully scale to the multilayer cells needed for commercialization.

The firm affirmed a steady progress into 2022 by very first 16-layer cell, and results over 500 cycles with 16 layers. However, higher officials of the company also noted that more work remains to be done on the quality, consistency of materials and processes before the firm may achieve the goals of commercializing the technology.

Further, the firm continues to target the delivery of its A-sample cells to at least one customer in 2022. The A-sample will have dozens of layers and will demonstrate the core functionality of the battery cells. Furthermore, after achieving the goal of producing A sample prototype cells, the firm expects to receive most equipment for QS-0 towards the 2023 goal of producing candidate B-sample cells from that line. Commercialization, as one official noted, may be defined as the production of C sample cells made available for sale to a third party. The firm is targeting the C-sample out of QS-0 as well.

QuantumScape expects CapEx investment during 2022 to be more heavily weighted towards the back half of the year. Also, as per the forecast, OpEx would grow steadily during 2022 and 2023 OpEx would grow modestly from 2022 levels as the firm slows down the headcount growth rate, reallocating resources from development to manufacturing, and realise gains from investments into automation.

Funding of QS

QuantumScape raised $1.2B in funding over 9 rounds, with the latest funding to have come on Aug 2, 2021, from a Post-IPO Equity round. Their stock opened at $23.50 in its Nov 27, 2020, IPO. In total, the firm raised funds from 10 investors. This includes the latest investors – Qatar Investment Authority and Fidelity Management and Research Company.

Since peaking at $54 billion in December 2020, its market capitalization has fallen and stands at $4.73 billion in June 2022. Clearly, it still has a high valuation no revenue and hyped technology. In addition, its valuation relative to rivals is too high.

Why is Quantumcape Vulnerable Now?

 With its value down as sharply as it is, there is no doubt that it will attract potential suitors, who will find the price far more palatable now. With key milestones within reach, Quantumscape is also going to need a huge dose of fresh fund raising to set up manufacturing at scale, seeing how solid state battery manufacturing is a completely different kettle of fish to Lithium Ion battery manufacturing. That means, firms, be it battery majors like LG Energy, or even Auto players like Toyota have a much better case to consider a pitch, as compared to say, a year ago when both valuations and progress was hazy. Watch this space to know more, as a move, if at all, will be made within 2022 itself.