QuantumScape: Your Future Car Will Be A Solid-State Battery Electric Vehicle (NYSE:QS)

Personal automobiles are more than just a way to get from one location to another, they’ve allowed billions around the world since the turn of the twentieth century to go wherever they want, whenever they want, and with whomever they want. They fundamentally represent a type of unrestrained personal freedom and it is a little wonder why they continue to proliferate on the back of an aspiring global middle class more than a century since their invention. But internal combustion engine vehicles, which currently account for more than 99% of all vehicles on US roads, come with a material number of negative externalities. The current status quo is not sustainable with rapid ecosystem collapse and mass extinction, both already happening, likely to be sped up by rising carbon emissions in the decades ahead.

However, gas and diesel-powered vehicles should not be villainized, they have and will remain machines critical for the personal mobility of many around the world. But EVs represent a step change in the present drive to confront the evidence that Earth is warming at an unprecedented rate due to human activity. This underpinned Tesla’s (TSLA) 2006 Master Plan where Elon Musk describes EVs as important for a more sustainable future. QuantumScape (NYSE:QS) from SoP in 2025 will help accelerate the move from a hydrocarbon-based economy towards one based on renewables and electrification. The mission is to restrict the rise in mean global temperature to well below 3.6 °F above pre-industrial levels and QuantumScape will form a key gear in the machinery for this to happen. Solid-state batteries embed greater energy density across EVs allowing them to move further, be safer, and with faster charging.

The Three Horsemen Of Solid-State Batteries

QuantumScape just reported earnings for its fiscal 2022 third quarter where management gave operational updates. There are two main points shareholders should take away from the earnings call.

Firstly, capital expenditure during the quarter was at $54.1 million, up from $27.6 million in the prior quarter and broadly reflected expectations. This long march to commercialization by 2025 means careful management of its liquidity position and cash burn will be integral to prevent pertinent dilutive equity raises from now until 2025. The company has guided for a lowered capital expenditure of at least $175 million this year aggregated with cash operating expenses of at least $225 million. Hence, QuantumScape should exit this fiscal year with at least $1 billion in cash and equivalents. Such a strong buffer provides a high level of clarity on the company’s ability to realize its roadmap. QuantumScape stated that it will continue to chase cost reduction opportunities where it can against the broader weakening macroeconomic context which continues to restrict near-term upside.

Secondly, the company made progress on dramatically reducing the level of a contaminant found in their 24-layer A sample. QuantumScape intends to use this sample to demonstrate a commercially relevant battery cell format. It’s a significant increase in layer count relative to previous generations of its customer battery samples and would be a validation of their lithium-metal anode and ceramic separator technology. The company is ramping up separator film production and building more 24-layer cells to collect data but will not begin shipping cells for customer testing until enough data has been collected.

Further, the company shipped dozens of its zero externally applied pressure single-layer pouch cells to a number of consumer electronics companies. Whilst the automotive sector will remain the primary driver of long-term growth, management believes there will be opportunities in other markets including consumer electronics. QuantumScape’s battery cells can run with zero externally applied pressure. This makes them suitable for consumer devices under volume constraints.

Limited Near-Term Upside But Longer-Term Outlook Is Bright

There is little doubt that climate change is real. Hence, it’s right that there is a concentrated push from private capital to create technology that creates solutions. Unfortunately, life is seldom so simple and whilst EVs continue to see dramatic adoption they still fall short on certain factors which create the background for solid-state batteries to be the catalyst needed to take their ongoing adoption to a runaway level. So as the company continues to make incremental progress with its battery samples, we could be slowly moving towards a future where SSBEV, or solid-state battery EV, becomes a common acronym across the automotive retail space from 2025. This would be to distinguish them from the conventional BEVs.

QuantumScape really is an asymmetric play on a more sustainable future for transport. The stakes are truly high and the impact from SoP will be outsized. This won’t just be across the automotive sectors but will likely include everything from consumer electronics to eVTOLs and home battery storage. The company stands to play a significant part in the drive for a low-emissions society. In this, personal automobiles become sustainable beacons of personal mobility and freedom.