QuantumScape: More De-Risking Events And Milestones Achieved (Rating Upgrade)

seekingalpha08-20

QuantumScape's Alpha-2 prototype delivery marks significant progress towards commercialization of solid-state batteries, potentially revolutionizing the EV industry.Strategic partnership with PowerCo ...

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JHVEPhoto Investment thesis In March, we have looked at QuantumScape (NYSE:QS), which is a company developing a new kind of battery that can store more energy and eliminate the drawbacks of lithium batteries. Since then, we have witnessed that the company has made different progresses in its business operations and technological capability, which will be discussed below. After the revisit, based on the improved situation and increased sales forecast, we are upgrading the company to a Buy.   Image created by the author Technology updates: One step forward to commercialization through new prototype The solid state battery developer has already delivered samples of its new cutting-edge battery to OEMS as it inches a step closer to commercialization and implementation. By providing the latest advanced Alpha 2 cells with a higher density capacity, the company has achieved one of its 2024 goals. The milestone is a step forward in the company's decade-plus journey in developing scalable energy solid-state battery cells that can achieve cost parity compared to the much more popular lithium-ion cells. Likewise, the new solid-state batteries will elicit strong interest from electric vehicle companies, given their high-density capacity and energy efficiency. The new Alpha-2 models represent a crucial step in bringing to market QSE-5; QuantumScape's inaugural intended commercial battery. The company began its journey through the automotive certification process in December 2022 following the delivery of A0 prototypes to clients. The Alpha-2 models incorporate numerous key enhancements to the company's major components acquired over the past year. The six-layer Alpha-2 model boasts a higher energy density compared to the previous 24-layer A0 model. QuantumScape The company will continue to build and ship Alpha-2 prototypes to car manufacturers in the upcoming months, concentrating on enhancing their dependability and increasing their manufacturing output. Its primary goal encompasses accelerating the production of the Raptor, starting the production of a limited number of QSE-5 prototypes, and getting ready for the large-scale manufacturing of its solid-state electrolyte separator through the Cobra machinery and method, anticipated to start in 2025. Business updates: Ramp up production in the face of growing market The strategic collaboration positions the company at the forefront of energy storage innovation. Working with PowerCo should accelerate the commercialization and adoption of game-changing batteries.   EV.com As part of a non-exclusive license agreement, PowerCo will produce 40 gigawatt-hours (GWH) annually using QuantumScape's technology, possibly increasing production to up to 80 GWh each year. The high capacity should see QuantumScape's technology find its way into more than 1 million cars annually, creating a reliable revenue source. As the two companies work to reach high production levels in the gigawatt-hour range for solid-state technology, they should satisfy the increasing worldwide need for improved electric vehicle batteries. In return, they should be able to create reliable revenue streams and generate significant value. Expanded electric vehicle opportunity The ongoing trend towards adopting electric vehicles (EVs) shows no signs of slowing down. Amid the years of research and development, current battery technologies are still unable to meet the needs of a large part of the car industry. There's an undeniable need for a new type of battery that can significantly increase the use of EVs, which QuantumScape is well positioned to address with its cutting-edge solid-state battery, which is already eliciting strong interest from Volkswagen. The solid-state lithium-metal technology stands out as the frontrunner in the development of next-generation batteries to capture this vast market potential. The strategic partnership with PowerCo comes can contribute to the mass adoption of the technology, allowing QuantumScape to generate significant value. The exclusive licensing agreement also enables the company to explore other opportunities while maintaining our commitment to innovation and maximizing our return on investment. The deal also marks an essential step in the quest to transform the energy storage sector and deliver outstanding returns for investors. Fundamental perspective Above all fundamental issues, the appointment of their new CEO, Dr. Siva Sivaraman, who has decades of experience scaling production for technology products by building factories and establishing partnerships, is a significant milestone. The company’s former CEO, Jagdeep Singh, will then transition into a Chairman role. This signals that the company is trying to accelerate its production and commercialization timeline. Balance sheet boost The capital light licensing deal with Volkswagen’s PowerCo is expected to lengthen QuantumScape’s cash runaway into 2028. The company is on course to receive a $130 million prepayment of royalties as part of the licensing deal expected to bolster its balance sheet. In the second quarter, QuantumScape capital expenditure stood at $18.9 million, attributed to spending on equipment purchases that are expected to ramp up low-volume QSE prototype production. While the company did plunge to a GAAP net loss of $123 million, it ended up with $938 million in liquidity. Similarly, the licensing deal with PowerCo offers a capital-efficient path to market for the company’s solid-state batteries. Additionally, it remains in a solid financial position with over $900 million current assets to ramp up the production, which is using around $120 million cash per quarter, giving the company a more than 1.5 year runway. QuantumScape Valuation and target price While the stock is down by about 13% year to date, with the S&P 500 up by about 17%, it has shown some signs of breaking out in recent months. In July, the stock nearly doubled as investors reacted to the multimillion battery technology licensing deal with Volkswagen PowerCo, which has since pulled back after the rally Comparing the valuation multiples with its peers Amprius Technologies (AMPX) and Microvast Holdings (MVST) who are already in the commercialization stage, Quantum Scape was over-valued, but now closer to its peers, in some of the forward-looking ratios based on future sales and revenue, taking into account forward forecast for the year 2027, which is when the company expects to generate its first revenues.    Image created by author with data from Seeking Alpha Therefore, with the improved sales and profitability forecast starting from 2025, the company now shows more attractive risk-reward in the long-term. Based on the target P/S ratio at around 8x, which is in line with its peers and its current multiples, and our model forecast at 2028 when the company enters into full speed at its commercial operations, the target valuation we are giving QS would be at $6.8 - $8. Therefore, it is a buy for us.  Image created by author with data from Seeking Alpha Investment risks  There are three investment risks mentioned in our last analysis. While there are progress made in both business and technology level, the risks will continue to affect share price, but maybe to a lower extent:   Technology delay: The company has a record of delaying production and timeline, which has affected our original forecast. But as more de-risking events unveiled, the company is now in a better place. An investor should pay attention to the progress updates and adjust position since a further delay will negatively impact the company’s target price  Technology upgrade: As mentioned, battery technology is one of the hottest areas for investment and many competitions can be foreseen. QS’s prospect will therefore be dependent on its competitiveness. But a strong competitor will surely impact the company’s valuation  Financial health: Under the current high interest rate and slowing growth environment, investors should pay attention to the burn rate and runway of the company, in case of any financing needed. 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