QuantumScape Stock: Please Don’t Fight EVs (NYSE:QS)

Don’t fight the Fed is a saying that cautions investors to align their investments with the current monetary policies of the Fed rather than against them. In the current zeitgeist characterized by record inflation and rising Fed fund rates, to not fight the fed would mean to continue to avoid risky assets and embrace the risk-off sentiment that has gripped the capital markets. In the same vein, the growth of electric vehicles represents an 800-pound gorilla that has been fattened up with the recent Inflation Reduction Act. This will see the US government allocate $370 billion over ten years to decarbonization initiatives over the next decade. The act is expansive and encapsulates green energy to domestic battery manufacturing to EVs.

For QuantumScape (NYSE:QS), the act now means it stands three years away from commercially entering a sector about to realize a material level of government support. This will catalyse greater EV uptake through the provision of a $7,500 EV tax credit that will last until the end of 2032 from early next year. Hence with the fledging yet fast-growing US EV sector about to expand, QuantumScape’s long-term TAM has been expanded.

Automotive Industry On The Brink Of The Biggest Transformation In 100 years

Battery technology has stalled with the current lithium-ion battery chemistry virtually unchanged for decades.

Lithium-metal batteries represent the next generation of batteries and are a significant step-change in battery performance required for EVs to better compete with internal combustion engine vehicles. To put this simply, there will be ICE redoubts even against the IRA-provided EV subsidy. Range anxiety represents an irrefutable barrier against EV adoption with gasoline being materially more energy dense than current lithium-ion batteries. At about 100x the energy density of a lithium-ion battery, the use cases of gasoline-powered cars will extend far beyond the reach of current lithium-ion batteries. Hence, there is simply no way for the growing list of states and nations to reach ambitious targets to phase out the sale of new fossil fuel vehicles. This list now includes California, the United Kingdom, the European Union, and South Korea. More US states and nations around the world plan on joining this fast-growing list of jurisdictions with a planned date to phase out new sales of fossil fuel vehicles.

However, electric motors convert the energy stored in the battery to motion at around a 60% to 80% per cent efficiency versus a typically 15% efficiency for internal combustion engines. With a ratio of about 5, the new generation of solid-state batteries would only need an energy storage density one-fifth of that of gasoline to have the same range as an ICE vehicle. Whilst not a 5x, QuantumScape’s solid-state batteries can deliver 50% to 80% better energy density than current lithium-ion batteries with the added benefit of a non-flammable separator and quick charging from 10% to 80% in just 15 minutes. This will be integral in speeding up EV adoption in 2025 when it commences its Start of Production following pre-pilot production next year.

This will see its partnership with Volkswagen (OTCPK:VWAGY) eventually ramp production to 21 GWh per year. Volkswagen has tested multiple generations of QuantumScape’s cells and has publicly validated performance at automotive power levels.

The Structural Phase-Out Of Fossil Fuel Vehicles

To be clear, an investment in QuantumScape is incredibly speculative. Indeed, the company is not yet realizing any revenue and is at least three years away from meaningful sales. There is a lot that could go wrong especially around a pushback on current timelines and some doubt still exists about whether the technology is ready for commercialization. Solid-state batteries actually have over a decade of research behind them but have faced an unrelenting rate of commercialization failure. As dozens of private startups and research institutions around the world are chasing the high energy density dream promised by solid-state batteries, the field could quickly get competitive if and when these come online. Further, whilst QuantumScape’s partnership with Volkswagen represents a material moat against what could be not immaterial competition, the company could face barriers to expanding to other automakers if there are more options.

Decarbonization has grown to take up an almost gospel-like zeal with the Inflation Reduction Act and the ongoing phase-out of fossil-fuel vehicles. Fundamentally, these phase-outs will struggle to find success without solid-state batteries. This places QuantumScape at the centre of the global effort to decarbonize passenger vehicles. But investors should be careful as when you invest in a company that is pre-revenue you are essentially investing based on good faith statements made by management. QuantumScape happens to be the most high-profile solid-state battery company in what is now a fast-growing total addressable market. The Inflation Reduction Act stands to be a real game changer in terms of EV adoption but the limitations of lithium-ion batteries still exist. This opens a future that cannot possibly be realized until solid-state batteries reach commercialization.