QuantumScape May Need A Buyout To Stay Viable

seekingalpha04-10

QuantumScape is entering the final prototyping stage and plans to begin low-volume production by the end of 2024.The company's solid-state lithium battery has shown promising results in testing but ...

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href=https://seekingalpha.com/article/4682957-quantumscape-may-need-a-buyout-to-stay-viable><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>QuantumScape is entering the final prototyping stage and plans to begin low-volume production by the end of 2024.The company's solid-state lithium battery has shown promising results in testing but ...</p>\n\n<a href=\"https://seekingalpha.com/article/4682957-quantumscape-may-need-a-buyout-to-stay-viable\">Source 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challenges as the firm brings it into production.QuantumScape faces risks in materials sourcing, scaling, and customer capture, and may need to be acquired for production scale and viability.Hiroshi Watanabe/DigitalVision via Getty Images QuantumScape (NYSE:QS) is nearing the next phase of operations as it enters the final prototyping stage. The next phase will entail low-volume production, which is targeted to ramp by the end of 2024, followed by higher volume production in 2025. The firm currently has six automotive OEMs testing their A0 prototype to determine efficacy for their next-generation fleets. Given their remaining cash position, the macroeconomic headwinds in the EV space, and speculative positioning, I believe that QuantumScape is walking a tightrope and must perfectly execute this transition phase to remain a viable, standalone business. I rate QS shares a sell, with a price target of $4.05/share at 1.5x book value. Investment Thesis QuantumScape is in the early stages of bringing their solid-state lithium battery to market. The firm recently completed their A0 battery prototype and had it shipped out to six automotive OEMs for testing. The solid-state QSE-5 battery is said to have better energy density, power, and faster charging when compared to the batteries deployed across the various EV fleets and may inevitably be the next stepping stone in the electrification process. The QSE-5 battery cells will consist of 24 layers using electrolyte-separators produced using the to-be-released Raptor equipment and process. Raptor is expected to ramp low-volume production in eFY24, followed by Cobra for higher volumes in eFY25. Major risks include materials sourcing, scaling, and customer capture. I believe the firm will need significant scale across automotive OEMs in order to turn a profit at the expected margins for their battery technology. Volkswagen (OTCPK:VWAGY) recently underwent their prototype-testing phase on the battery with promising results. The only factor that will need to be addressed is QuantumScape's ability to bring the product to market and manufacture their batteries to cater to the potential demand. Operations QuantumScape laid out a very compelling roadmap to scaling their solid-state battery technology in their Q4'23 earnings results. The firm shipped their first A0 prototype cells to customers at the beginning of 2023, with promising results from the Volkswagen Group. The battery completed 1,000 cycles with over 95% capacity retention, suggesting that the solid-state technology has the potential to improve durability and battery life from the current fleet. Management anticipates 2024 will be the pivotal year for QuantumScape as they plan to begin low-volume production of the QSE-5 prototype production, with a ramp-up in volumes in 2025. This coincides with Ford's (F) strategy to pull EV production in 2024 and begin rolling out their next-generation, electric fleet closer to 2026. If all goes according to plan, this can create some significant tailwinds in terms of timing for the next wave of production of electric vehicles. Comparing QuantumScape's ramp-up to Goldman Sachs' estimates, they both appear aligned with market expectations. Goldman Sachs More recently, the current administration released softer fuel economy standards that may result in a slower ramp-up of the next fleet of electric vehicles. I believe that this will be a major win for automotive OEMs as consumers still prefer ICE and hybrid vehicles over the current EV fleets. Though I do not believe the transition is a matter of if, but rather when, I anticipate when to continue to be pushed further out until more reliable battery technology is available at an affordable price. Kelly Blue Book reported that the average cost for a new electric vehicle was ~$10,000 higher than a traditional ICE vehicle. According to a Forbes article released in 2023, the average insurance premium for electric vehicles was $2,280/year higher than their ICE predecessors. I believe that if both of these factors converge, consumers may become more willing to make the switch to an all-electric vehicle. QuantumScape mentioned in their presentation at the recent Bank of America Global Automotive Summit that they will not be targeting the plug-in hybrid vehicles. Despite staying true to their roots in the BEV market, I believe that this could hamper near-term growth opportunities as hybrid vehicles are seen as the go-to model for consumers. As mentioned in my report covering Ford, sales for hybrids increased 65% y/y for the firm on higher volumes when compared to 80% for their electric truck. As scaling electric vehicle sales have slowed, traditional OEMs are pushing out start dates for their new electric fleets and may result in less demand for new battery technology in the meantime. I believe this factor may also add some competitive pressures to QuantumScape at a high level in which other battery manufacturers like CATL, who already have the supply chains, scale, and OEM relationships, have time to improve power density and efficiency for the next generation of fleets. Taking into consideration management's two-year roadmap for QuantumScape, I anticipate the firm to experience operational challenges given their current stage of production. Once the technology is proven with their shipped prototypes, the firm must close contracts with the OEMs at prices and volumes that will allow for scale and profitability. From there, the firm must map out their supply chain for sourcing the required quantities of metals to manufacture the solid-state batteries and put them into scaled production. I anticipate the feasibility factor to be a major headwind for the firm when the time comes without the assistance from an outside manufacturer and may require some form of partnership or a buyout for the batteries to reach scale. Though this is purely speculative, I do believe it is a viable argument as battery manufacturing is not scaled at the same capacity domestically as it is in China. In addition to corporate competition, there are significant geopolitical risks involved in sourcing raw materials for electric vehicles. China currently refines 89% of the world's neodymium and praseodymium, which are key metals found in EV magnets. There are a few domestic mining companies that are either evaluating mines for REEs domestically or producing REEs offshore for domestic use. Two firms doing this include Ramaco Resources (METC) and Energy Fuels (UUUU). In addition to this, Exxon Mobil (XOM) is in the process of ramping up production of lithium mining and processing in the US, which should reach production levels by 2027. I believe that if each of these firms is successful in their minerals sourcing, most of the demand for domestic EVs should be met by domestic minerals production. US Geological Survey Valuation & Shareholder Value Corporate Reports In terms of financials, QuantumScape does not generate revenue and has roughly seven quarters of cash remaining on the balance sheet. Given that QS is a speculative name with no earnings on which to base valuation, total book value or book value of fixed assets may be an ideal metric for valuation. Given the factors listed above, I believe that QuantumScape may need to be acquired to reach the level of production scale necessary for the company's viability. With the current state of the electric vehicle market and market competition, I believe this will be the best path for the firm to undergo if production targets are not met as we near the final quarters of cash. Placing a valuation on the firm will be challenging given the market dynamics. Given the firm's speculative state, cash burn, and EV macroeconomic factors, I provide QS a sell recommendation with a price target of $4.05/share at 1.5x book value, resulting in a -34% decline in value at current share price levels. Corporate Reports Chief Legal Officer Michael McCarthy has sold a significant amount of shares over the last three months. Though there are many reasons for insiders to sell their shares, I believe this situation is a signal for the future trajectory of the firm as they remain in the speculative, pre-revenue phase of the cycle.  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