To The Moon

It was a volatile but green week in the stock market as investors assessed the Fed’s rate hike, inflation data, and earnings. The best-performing concepts are solid state battery, security & alarm services and online education.

Considering the different perceptions of the stock, this time TigerPicks choose $Quantumscape Corp.(QS)$ to have a fundamental highlight to help users understand it better.

$Quantumscape Corp.(QS)$

QS is a company that develops solid-state batteries for electric vehicles. The stock has been rising in the past five days for several reasons, according to some analysts and news sources. Here are some possible factors that contributed to the stock’s performance:

• QuantumScape reported its second quarter 2023 earnings on July 26, and revealed its plans to launch a commercial battery product with a prospective customer. The company also claimed that its batteries have a capacity of more than 1,000 watt-hours per liter and can charge from 10% to 80% in just 18 minutes.

• The company received positive ratings from some analysts, who praised its technology and growth potential. For example, Morgan Stanley initiated coverage on QS stock with a buy rating and a $15 price target on July 27. The analyst said that QuantumScape has a “unique and proprietary” battery technology that could disrupt the EV market.

• The stock also benefited from the general optimism in the EV sector, as several EV makers reported strong earnings and sales in the past week. For instance, $NIO Inc.(NIO)$ announced that it delivered a record 8,083 vehicles in June, up 116% year-over-year. $XPeng Inc.(XPEV)$ also reported a 439% increase in deliveries in the second quarter, reaching 17,398 units.

• The stock may have also experienced some short covering, as it has a high short interest of about 20% of its float. Short covering occurs when short sellers buy back the shares they borrowed to close their positions, which can create upward pressure on the stock price.

These are some of the possible reasons why QS stock rose in the past five days. However, the stock is still very volatile and risky, as it faces many challenges and uncertainties in its path to commercialization. The company has not yet proven that it can mass-produce its batteries at a low cost and high quality, and it faces competition from other battery makers and EV manufacturers. Therefore, investors should be cautious and do their own research before investing in QS stock.

Promising Developments

EV battery makers are constantly trying to come up with the optimal chemistry that can balance energy density and power. As the image below suggests, QS’s first commercial product, now titled ‘QSE-5’, could upend the status quo by offering a far more compelling trade-off between energy and power.

QS is able to ensure higher power density on account of less-onerous ion transportation paths, and their higher energy density is a function of their anode-free design architecture.

Energy-power tradeoff

Q2 Shareholder letter

QS’s new ~5 amp-hours (Ah) cells (the popular 2170 battery used in most EVs has a capacity of less than 5Ah) could hit 80% charge in less than 15 minutes, whilst providing energy density of over 800 Wh/L. With such a compelling trade-off, it shouldn’t come as any surprise that QS management recently mentioned that they were working closely with an auto OEM for a potential launch, “as rapidly as possible”. We would have preferred to get more unambiguous communication on the potential launch timeline, but this is still a step in the right direction.

Then, there’s the growing safety quotient of QS’s cells. One of the drawbacks of traditional lithium-ion cells is that they tend to cope poorly during steep heating conditions. This is inherently down to their polymer-based separators which can be quite combustible. On the other hand, QuantumScape is well-positioned to negate this issue as their cells use solid-state ceramic separators that can withstand heating conditions of up to 300 degrees Celsius, and are also less immune to short circuits. QS knows where it cells stand with regard to these capabilities, but it still needed external validation.

Well, the company has been shipping these 24-layer A0 prototype cells to various auto OEMs for a while now, but in Q2, these cells were put through the wringer by a leading OEM who ran a series of customized safety tests. QS's protocells managed to come through unscathed, and we think this is certainly a step in the right direction as far as the credibility of the tech is concerned

If QS management continues to execute according to plan, and their ceramic separators gain wider adoption, the company is going to have to inculcate a more efficient separator manufacturing set-up that can function at scale.

In that regard, we’ve also been enthused to note the initial implementation of a fast-separator heat treatment process that could process these separator films at a greater pace and lead to better throughput. QS plans to bring this through two stages (stage 1 will be called Raptor, and stage 2 will be called Cobra) and stage 1 will be ready by the end of this year with production to start next year (although installation of the stage 1 equipment is already complete). QS’s existing set-up generates around 5000 separator films, but once stage 1 (image below) is in full flow, they could be looking at 15000 separator films a week.

Raptor

Q1 Shareholder letter

Needless to say, to successfully execute its strategy, QS is also going to need ample funds. In recent quarters, the company has been burning cash to the tune of $90m per quarter (roughly one-third is CAPEX and the rest is linked to cash OPEX), and for the full year, these initiatives could well suck out cash to the tune of $425m (potentially $150m of CAPEX and $275m of Cash OPEX).

In light of these requirements, it hasn't been too encouraging to note QS's fast-depleting cash and liquid resources which have continued to slide sequentially and stood at less than $1000m by the end of Q2.

Liqudity

YCharts

Given the current level of CAPEX and OPEX spending run rate, it looks like they could get by with existing resources for the next two years (to be more specific, QS management thinks they could stretch it to the start of H2-25). Hopefully by then, more OEMs would be prepared to embrace QS’s solid-state lithium metal tech. Besides, as RAPTOR and COBRA make their presence felt within the overall manufacturing process, the unit economics may look a lot better, and we may not quite have to deal with a bloated OPEX base by the time they close FY25.

Closing Thoughts: Stock-Related Considerations

We’ve written previously about how QS's stock may appeal to certain investors looking for rotational opportunities within the broad battery lithium and battery tech space; that thesis still holds, as the relative strength ratio of QS, as a function of the LIT ETF, is still at rather lowly levels of sub 0.2, roughly 85% off the mid-point of its range.

QS:LIT

Stockcharts

However, if one looks at the weekly price imprints of QS alone, we are not entirely convinced that the risk reward looks too enticing for a long play at this juncture.

Weekly chart

Investing

Over the last year or so, we can see that QS has been chopping along within an approximate trading range of $5.5-$11. What's also evident is that as it gets closer to the $11 level, the bulls lose their confidence and additional supply comes on board. In recent weeks, we’ve seen a lot of candles with long wicks germinate, as the stock inches close and hits the upper boundary of the range.

The lack of sustained bullish momentum, could also, in part, be attributed to the lack of positive positioning by the sell-side community, which can be very influential in dictating fund flows to a particular counter. Until the end of 2022, QS had only one sell-side analyst who was bullish on the stock. Now, five out of the eight analysts who cover it have a HOLD, with the rest maintaining a SELL rating. Crucially, the average price target of the entire sell-side community works out to just $6.25, implying a downside of 42%.

Sell-side ratings

Seeking Alpha

In the weeks ahead, it is quite possible that we see a more favorable tweak in sell-side positioning, and QS may also push on from this trading range soon enough, but given the previous failures at these levels, we think it would be more prudent to wait for the price to pull back to the mid to lower end of the trading range before a long position is considered.

Revenue estimates

YCharts

Besides, investors should also consider that even if QS starts generating revenue from next year, and then kicks on even further with another 5x jump in FY25 revenue to $19m (as implied by consensus), that would still make the stock a very expensive proposition to own, at the current market-cap of roughly $4.75bn, that's an implied forward P/S multiple of over 250x.

Stock Price Forecast:

Here are the target price forecast for the future 12 months from analysts on CNNMoney.com.

The 8 analysts offering 12-month price forecasts for Quantumscape Corp have a median target of 6.50, with a high estimate of 10.00 and a low estimate of 2.00. The median estimate represents a -51.00% decrease from the last price of 13.27.

Resource:

https://seekingalpha.com/article/4621101-quantumscape-executing-well-but-not-quite-a-buy

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