QuantumScape: Curb Your Enthusiasm About Volkswagen’s Test Results (NYSE:QS)

QuantumScape Corporation (NYSE:QS), despite its appeal as a potential disruptor of EV battery technology, has always been uninvestable in my eyes. Last August, when QS stock surged past $12.50, I claimed that the stock was not a buy based on the answers to three questions.

1. Can solid-state batteries replace lithium-ion batteries in EVs?
2. Can QuantumScape expand its production capacity to meet the demand for solid-state batteries if the answer to the first question is in the affirmative?
3. Can QuantumScape enjoy long-lasting competitive advantages?

I did a deep dive into the company’s business model, solid-state battery technology, and industry conditions to find reasonable answers to these questions only to conclude that QuantumScape’s future is difficult to predict. Since then, QS stock has lost more than a third of its value, and I believe now is a good time to revisit my thesis for the company on the back of the encouraging results from its tests with Volkswagen.

Volkswagen Test Results Drive Hope; But Curb Your Enthusiasm On QuantumScape

In my previous article, I highlighted longer driving ranges, shorter charging times, and higher energy density of solid-state batteries as potential value drivers of this technology compared to lithium-ion batteries. The test results published by PowerCo on January 3 confirm the attractiveness of solid-state batteries on all these fronts.

QuantumScape’s solid-state batteries achieved 1,000+ charging cycles and retained a staggering 95% of their capacity, highlighting the energy density of these batteries and their durability. For an EV with a range of around 500 km, this corresponds to a total mileage of approximately 500,000. This is a milestone achievement for QuantumScape, no doubt. And this has been coming for a long time.

Exhibit 1: Test results

The test results immediately improved the market sentiment with the stock jumping over 40% following the update. I was not surprised to see this given that these test results establish the commercial importance of solid-state batteries. In addition, the timing also seems right with the company previously guiding for serious production of batteries starting in 2024.

All that said, I believe there is one major reason for investors to curb their enthusiasm; QuantumScape is nowhere near mass production of these batteries. You need not look further than the recent Volkswagen press release in which the company wrote:

The tested solid-state cell consists of 24 layers and thus already corresponds to the planned series cell. The next step on the way to series production is now to perfect and scale the manufacturing processes.

Scaling up the production of solid-state batteries is easier said than done. Several barriers limit the commercialization of this technology.

1. The complex manufacturing process compared to lithium-ion batteries, which significantly increases the cost of solid-state batteries.
2. Increasing the scale of production is likely to come at the expense of quality, at least in the initial stages, which makes it challenging to maintain cost-efficiency and quality.
3. Solid-state batteries are deemed safer than lithium-ion batteries but this is yet to be validated in mass production environments and real-life situations.

The aforementioned challenges are faced by each and every solid-state battery manufacturer. As QuantumScape investors, there are a couple of company-specific risks to monitor.

First, there is increasing competition in the solid-state battery manufacturing sector with big automakers wanting a piece of the pie. Toyota Motor Corporation (TM) is proving to be a frontrunner and a meaningful contender to QuantumScape. Last October, The Financial Times revealed that Toyota was gearing up to mass-produce solid-state batteries by 2027 or 2028. A Toyota engineer, when asked about the production capabilities of the company, said:

In terms of the stacking speed, we are almost there. We are going to roll out bigger volumes and check the quality.

Vikram Gulati, country head of Toyota Kirloskar Motor (India), said earlier today:

We are rolling out an electric vehicle with solid state batteries in a couple of years from now.

Toyota, the largest automaker in the world by vehicles sold, is progressing well toward achieving its objective of mass-producing solid-state batteries to power its future generation of EVs.

QuantumScape investors, in my opinion, should pay close attention to Toyota’s progress as this presents a meaningful threat to the company.

Second, solid-state battery manufacturers are using various technologies to build batteries, and at this stage, it is difficult to determine which technology will prove to be more effective in scaling production. Let me give you some examples to highlight the different technologies used by different battery manufacturers.

Click to enlarge

Source: Electronica

For now, there is a battle among all these companies to rise to the top of the solid-state battery manufacturing ladder using different types of technologies. If QuantumScape’s technology fails to deliver the desired results ahead of its rivals, the company may not be able to enjoy the first-mover advantages to this space, as expected. This will be a massive reputational and financial blow to the company, and I am not ready to rule out this probability.

Volkswagen’s test results are encouraging, no doubt, but there are a lot of moving parts in the story. Not only am I concerned about the industry-wide challenges faced by solid-state battery manufacturers, I am concerned about the increasing competitive threats and the risk of QuantumScape’s technology failing to deliver the expected results.

Takeaway

QuantumScape is moving in the right direction. Commercialization, however, is still a distant reality. Going by the assumption that the company will, at best, mass-produce solid-state batteries by 2030, investors face the risk of Toyota displacing QuantumScape as the frontrunner in commercializing this technology. Although I am encouraged by recent test results that prove the attractiveness of solid-state battery technology and QuantumScape’s progress, I fail to find the company investable given that there is no clarity about its long-term future.