For anyone interested in basic pair trades amidst this market rally: Short - QS Long - SLDP warrants We have yet to hear a reasonable explanation from anyone other than keyboard scientists re: the current 358% premium QS trades at to SLDP -- despite QS being much further behind in the commercialization process.
QuantumScape (QS) Investment Memo
Date: 8/6/2022
Share Price: $12.28
Current Market Cap: ~$5.4bn
Sector: Tech – EV/SSB
Target Share Price: $3.35 (Base), BK (Bear), $19.60 (Bull)
Thesis: While it has fallen well over 50% from its 52-week highs, QS has not been bludgeoned nearly as badly as many of its small/mid cap tech peers. There are many growth names out there with real revenue that have fallen over 80% and now trade at earnings multiples below 10. The issue with QS is that there are no earnings or revenue metrics to use, as the company is many years away from significant revenue. In this risk-off environment, there is likely further downside ahead for this solid-state battery company that trades at a valuation 4x higher than its closest peer, despite being much further away from commercialization of its product. I expect QS to significantly dilute shareholders in the next year or two as it continues to burn cash while figuring out its commercialization strategy.
Recommendation: I remain bearish on QS, a quintessential story stock trading at a 300%+ premium to peers in a risk-off environment. QS is a California-based company developing solid-state batteries for the next generation of EVs. They developed the industry’s first anode-less cell design, which delivers high energy density while lowering material costs and simplifying manufacturing. This innovative battery cell technology can store energy more efficiently and reliably than today’s lithium-ion batteries, enabling longer range, faster charging, and safer operations in future EVs.
At the core of the QS bull case is the partnership with Volkswagen, the largest automaker in the world by revenue who has financially backed QS since 2012. Volkswagen expects to start rolling lithium-metal battery EVs off its production line by 2025 with an ambitious roadmap for almost 70 new electric models by 2028 with 22 million EVs delivered. However, it must be noted that Volkswagen recently established partnerships with 3 new companies specializing in battery development to support in-house EV battery development.
Of the public solid-state battery companies (QS, SES, SLDP), QS may have some of the best testing results, but it is the furthest away from commercialization of its batteries. SLDP has a pilot plant and will be delivering batteries to Ford and BMW for testing this year, while SES will begin sample production for Honda and GM in 2023. QS, on the other hand, still has not figured out the manufacturing component of its battery development, as their current battery with its solid ceramic electrolyte is still handcrafted in labs. QS holds cash and equivalents of $1.28bn as of its last reported quarter against quarterly operational cash burn of $47.4 million and capital expenditure of $39.3 million. Assuming cash burn remains constant, there is enough cash reserves to fund itself until 2025. However, the company has stated it will need to raise more cash to build out its future factories:
“The development, design, manufacture and sale of batteries is a capital-intensive business, which we currently finance through joint venture arrangements and other third-party financings. Over time, we expect that we will need to raise additional funds. We cannot be certain that additional capital will be available on attractive terms, if at all, when needed, which could be dilutive to stockholders, and our financial condition, results of operations, business and prospects could be materially and adversely affected.” (QuantumScape FQ1'22 10-Q)
Source: S&P – CapIQ, JR Research
Cash burn will continue through 2026 and significantly pick up pace if/when QS is able to start building out factories to produce its batteries. This will represent significant dilution to current shareholders.
Risks to my bearish stance on the company revolve around any unanticipated breakthroughs in the commercial development and prospects for QS. If QS is able to come from behind and roll out its battery offering earlier than SLDP, SES, and other competitors, the stock could surge much higher. Additionally, should market sentiment turn around and create another bull market similar to what we saw in 2021, story stocks like QS could get squeezed to higher levels. However, I feel the current inexplicable valuation premium of QS mitigates most of these concerns.
Key Metrics/Points:
Current valuation of QS is disconnected from peers with market cap of ~$5.5bn
358 % premium to SLDP ($1.2bn) – closest to commercialization and partnerships with Ford and BMW
224% premium to SES ($1.7bn) – hybrid battery close to initial production and partnerships with Honda and GM
QS is able to cite certain studies that show their battery to perform the best during lab testing, but each company does this, and the results do not justify a 300%+ premium
$1bn mixed shelf offering filed on 8/1
Would represent up to ~20% dilution at current levels
Likely that the company would need to raise more money to build the infrastructure necessary to commercially develop its batteries
QS has shown an architecture with the potential for 50-80% greater energy density, and published data showing the ability to charge to from 10 to 80% in 15 minutes with a non-combustible separator
Peers have similar data readouts
0 insider purchases during the massive selloff, but there has been consistent selling from management
Chief Manufacturing Officer, Celina Mikoljczak (prior senior roles at Tesla and Panasonic), was charged with leading the transition of the company’s tools and manufacturing processes from research and development to production, but she left the position in June of 2022 after less than a year
Not a positive sign for the prospects of QS commercialization, especially when it is behind peers in the process, as Celina is recognized as a lithium battery expert with the expertise to help QS scale their battery production
Conclusion: The prospects of further dilution, fierce competition, and lack of material insight into the future financial prospects of QS make it a story stock in a risk-off market. It may have fallen 94% from its astronomic highs during the de-SPAC process, but the company is still valued at around $5.5bn without any material revenue until 2026 at the earliest. Should the company’s valuation fall in-line with peers that are closer to commercialization of their batteries, the stock would still have another 70%+ to fall.
Source: SLDP 2021 Investor Presentation
Source: SES 2022 Investor Presentation
Peers are further along in their development than QS is at this time.
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