Solid Power: A Small Fish In A Big Pond

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Solid Power's R&D spending lags behind competitors like QuantumScape, backed by Volkswagen, further weakening its competitive position.The bad news for Solid Power is that QuantumScape is neither the ...

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Love Employee Investment thesis I had shared my initial bearish thesis about Solid Power (NASDAQ:SLDP) almost a year ago. The stock is extremely volatile, and it has experienced a lot of sharp ups and downs over the last ten months. As of today, my initial thesis aged well since the stock is now 5% cheaper than it was on December 11, 2023. A lot of developments have happened since last December. Therefore, today, I want to share new insights about the stock. SLDP appears to be advancing slowly compared to its close peer. Moreover, some giant conglomerates appear to already have clear roadmaps of starting mass production of their advanced EV batteries. SLDP's valuation looks not attractive as well. Therefore, I reiterate my \"Strong Sell\" rating for SLDP. Recent developments SLDP released its latest quarterly earnings on August 6, when the company missed consensus revenue and EPS estimates. It was the second consecutive quarter when SLDP missed consensus EPS estimates.   Seeking Alpha Since the company is still at early stages of its development and solid-state cells are still yet to commercialize, revenue is immaterial and substantially volatile. Therefore, I am not discussing the top-line dynamics. As the company continues investing in R&D, its adjusted EPS continued declining on a YoY basis, despite the declining number of outstanding shares compared to a year ago. Data by YCharts SLDP's operating cash flow was -$11 million in Q2, which does not look that bad if we compare it to SLDP's solid $131 million net cash position. That said, the company still has solid financial position to continue running its R&D to develop its products and bring it closer to commercialization.   Seeking Alpha Despite management reiterating its commitment to achieving key strategic objectives and milestones in 2024, this seems somewhat contradictory to the fact that they have lowered their 2024 revenue expectations to a range of $16 million to $20 million, compared to the $22.6 million consensus. During the earnings call, the management did not explicitly specify commercialization achievement timelines. Downgraded revenue guidance together with uncertain commercialization timing look like red flags. Of course, it is normal for a young company like SLDP to have volatile revenue, but the problem is that the state-solid cells industry is already very crowded. The company that will be the fastest in developing the technology will highly likely have solid strategic advantage over competitors. Among American companies, I consider QuantumScape (QS) to be the closest peer of SLDP. Data by YCharts From the above chart, we see that SLDP is not even close to QS in terms of R&D spending. While there is no direct correlation between the amount spent on R&D and technological breakthroughs, the gap in R&D spending is too wide to ignore and, in my opinion, it appears to be a significant drawback for Solid Power. The likely reason why QS is more aggressive in R&D spending is because it is backed by Volkswagen (OTCPK:VWAGY), the world's second-largest automotive company after Toyota (TM) in terms of physical volumes. Moreover, a few months ago, Volkswagen expressed its commitment to ramp-up solid-state battery production. Solid Power also has iconic partners backing it: Ford (F) and BMW (OTCPK:BMWYY), but these two companies are substantially smaller compared to Volkswagen, both in terms of total car deliveries and EV deliveries.   Compiled by the author Unfortunately for Solid Power, QuantumScape is not the only rival. As I mentioned earlier, Toyota is even bigger than Volkswagen in terms of volumes produced and delivered. The Japanese giant is also betting big on solid-state batteries. And these investments appear to be quite efficient, as the company has recently received a green light from the Japanese government to begin solid-state battery production in 2026. Toyota expects the initial ramp to be slow, but the fact that it has a clear approved plan already looks like a big win compared to Solid Power. It is also crucial to understand that the EV battery market is very attractive not only for automotive giants, but even for other large conglomerates as well. Samsung Electronics (OTCPK:SSNLF), the cornerstone of South Korean economy, has also advanced significantly in developing EV batteries. According to some sources, Samsung's 600-mile battery can potentially go into mass production as soon as 2027. To conclude, although the solid-state battery industry is not yet commercialized, the competition is already relentless. For a company like SLDP, it will be extremely difficult to compete, especially given its relatively small scale compared even to QS, not to mention giants like Toyota or Samsung. Therefore, Solid Power's future looks very cloudy and uncertain. Valuation update SLDP share price dropped by 26% over the last twelve months. The YTD performance is slightly better, but still, the stock lost around12% of its value since January 1. There is almost nothing to discuss from the valuation ratios perspective because SLDP only generates losses yet and sales are immaterial compared to the market cap. The level of uncertainty is extremely high, and given the fierce competition mentioned above, I am not entirely sure that SLDP will still be in business five years from now. With revenue still not far from zero and vast uncertainty around commercialization timing, simulating a DCF model appears to be useless.   Author's calculations According to projections from Wall Street, 2029 will be a crucial inflection point as the EPS expected to break even with a $212 million revenue. Once again, the level of uncertainty is extremely high, but even if we accept that SLDP will be able to generate $212 million in revenue by 2029, the valuation still does not look attractive. Even if we assume that SLDP is able to generate a 5% net income margin in FY2029, its net income will be around $11 million in 2029. With the current $229 million market cap, the FY 2029 forward P/E ratio is around 21.6. To understand how extremely high this level is, just look at how Nvidia's (NVDA) forward FY2028 P/E ratio looks like. Seeking Alpha By adding this context, I am not persuading readers to invest in Nvidia. I simply want to emphasize that NVDA's and SLDP's forward P/E ratios 4-5 years from now are not very far apart. However, one is the undisputed winner of the AI revolution, while the other is a big underdog [softly speaking] in a very young industry. Risks to my bearish thesis SLDP is an extremely volatile stock, and its share price range over the last 52 weeks spans from $1.10 to $2.35. The stock's price was around $1.3 in mid-March and rallied to $2.03 by the end of March. As a young company with no commercialization, share price movements significantly depend on headlines. For example, news that SLDP has signed a new partnership agreement with a major player might serve as a significant positive catalyst, potentially sending the share price up by tens of percent in a single day. Despite the extreme uncertainty about the timing of commercialization, I cannot deny that various scientists suggest solid-state batteries are indeed at another level of efficiency compared to those deployed by EVs at the moment. Therefore, the technology is disruptive, and any disruptor can potentially succeed. Even Tesla faced significant going concern risks in its early years, but it eventually became by far the largest automotive company by market capitalization. That said, the possibility that SLDP can indeed change the world with its new battery technology is above zero. Bottom line To conclude, I am still very bearish about SLDP and reiterate my \"Strong Sell\" rating. The competition is relentless, and the company looks extremely weak to compete against giants like Toyota and Samsung.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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