QuantumScape Stock: Don’t Buy Into The Porsche Hype (NYSE:QS)

Investment Thesis

QuantumScape Corporation (NYSE:QS) stock received keen attention from EV investors recently. The solid-state battery maker was rumored to be a battery partner for Porsche’s EV ambitions. The leading sports car brand targets to electrify 80% of its new car sales by 2030. Furthermore, Electrek highlighted that QuantumScape could be helping develop solid-state batteries for an electric version of its 911 flagship product. Given Porsche’s previous dismissal of an electric-911, investors were understandably excited about the prospects for QuantumScape’s technology.

QS stock has also recovered markedly from its January bottom. But, we need to emphasize that its technology remains a distance away from commercialization. Therefore, we encourage investors to use the rally as an opportunity to take their profits/cut losses. In addition, we also do not suggest investors add new exposure to QS stock.

Porsche’s Rumored Partnership Would Not Move The Needle For QuantumScape

The automaker sold about 302K units globally in 2021. In addition, its success was lifted by its all-electric Taycan, which delivered 41.3K units. However, investors should note that Porsche’s parent company, Volkswagen (OTCPK:VWAGY) already has a 20GWh JV partnership with QuantumScape. Furthermore, VW Group sold 8.88M vehicles in 2021, which included Porsche’s share. Therefore, Porsche’s unit sales represented a mere 3.4% of VW’s global unit sales.

Hence, we don’t consider Porsche’s interest as significant in moving the economics for QuantumScape. Consensus estimates would unlikely be upgraded to reflect Porsche’s projected sales. Furthermore, we aren’t sure whether Porsche would electrify all its products with solid-state batteries or use conventional battery technology.

But, we think it makes sense that Porsche would continue using conventional battery technology given its scale for most of its products. Porsche has a target to electrify 50% of new car sales by 2025. Therefore, QuantumScape’s technology is unlikely to be deployed in its initial electrification phase.

Is QuantumScape Stock A Good Long-Term Investment?

Management emphasized that it targeted to be operational by 2024-25. CEO Jagdeep Singh articulated (edited):

We have started with our Phase 1 engineering line at our R&D facility in San Jose. This facility has been used to make all the cells we have delivered to customers to date, including single, 4, and 10 layer cells. We have a new Phase 2 engineering line that is being built on our new QS campus. This will be where we produce our A sample later this year. We plan to follow that up with candidate B samples from our QS-0 pre-pilot line for 2023. The QS-0 line is also located on our QS campus, and that leads to our QS-1 production facility which we are targeting to be operational in the 2024-2025 time frame. (QuantumScape’s FQ4’21 earnings call)

QuantumScape reported about $1.45B in cash and equivalents in its recent quarter. Notably, the company also highlighted having sufficient funds to see through its CapEx expansion and various operational milestones moving forward. Therefore, investors should not expect new dilutive equity/debt financing in the near term.

Nonetheless, we remain concerned over increasing risks from competition in solid-state batteries. Nevertheless, the benefits from successful commercialization are undoubtedly massive. EV owners would benefit from a marked improvement in range at lower costs. Moreover, it also confers benefits to battery storage solutions. Therefore, its TAM could extend beyond the current $170B EV battery market. Singh accentuated (edited):

We’re finding that some of the same themes that resonate with the automotive space are resonating with storage as well. In fact, our understanding is that a lot of the storage guys are actually buying automotive-class batteries today.

And so energy density, if you can have a battery that’s 50% more energy-dense than conventional, that does translate to real economics. But some of those applications do need high power. So the power capabilities are important. Obviously, economics is important, safety. So all those metrics really, we’re finding do resonate with the stationary storage space. – QuantumScape

Nevertheless, we must highlight that QuantumScape remains at least three years away from commercializing its technology. Moreover, consensus estimates also suggest that it could see meaningful revenues only from FY26.

Hence, investors who choose to invest now are buying into what we consider hype, speculating that it could be successful. Furthermore, investors also need to consider whether QS can design a technology that it could produce at scale and adopted at scale by Volkswagen and other EV makers.

But, investors should note that QuantumScape would unlikely be the only battery maker utilizing solid-state technologies. Current battery incumbents have also been investing in solid-state batteries. Furthermore, they already have a well-diversified portfolio with massive scale advantages. For example, LG Energy Solutions has already secured 200GWh of long-term capacity in North America. Therefore, its scale easily dwarfed QuantumScape’s 20GWh capacity.

Is QS Stock A Buy, Sell, Or Hold?

QS stock is a hold. We encourage investors who added exposure at its January bottom to sell into the current rally. There are plenty of EV investment opportunities with scale, customers, and much less hype.