QuantumScape: The science is real. The valuation? Not so much.

One of the most unsettling developments in business in 2020 was the trend that having no revenues proved not to be a deterrent for electric vehicle (EV) companies to go public. Although, the practice is unheard of in the the automotive world, Nikola, Fisher and others have done it and achieved multi-billion dollar valuations. The latest rebel is QuantumScape (QS) - a battery start-up that became a public company in November after merging with a SPAC. Although, it won't generate revenues until 2026, its market cap exceeded $50B in the last week of December.

When the SPAC deal was announced, the parties decided a $3.3B valuation was appropriate. Except for QS showcasing its lab results, nothing material has changed between the SPAC deal and the last week of December to prompt the astronomical rise in valuation. It would appear that the same speculative fever that has many investors chasing the next Tesla has taken hold of QS investors. But is QS all hype, like Nikola, whose own technology (or lack of it) was the subject of a scathing short-seller report? Certainly not. 

First, QS has many prominent backers, including: Volkswagen (VW) which invested about $300 million and owns a 23% stake, Kleiner Perkins, Microsoft cofounder Bill Gates,  and hedge fund billionaire George Soros. QS also has JB Straubel, a former chief technology officer at Tesla, on its board. Such endorsements suggest there’s more here than just hype.

Second, the company appears to have pulled off a real feat - at least in the lab. How so? Well, building a solid state battery that will function at the rates and temperatures needed for real world applications is hard - very hard. So hard that nobody has done it. But in the beginning of December, QS released performance data demonstrating that its technology addresses fundamental issues holding back widespread adoption of high-energy density solid-state batteries, including charge time (current density), cycle life, safety, and operating temperature. The results were encouraging, which suggest the innovative chemistry could one day enable electric vehicles to travel further and be charged faster, at lower cost. It's important to mention that QS results were based on single-layer cells - these are the only batteries that it's been able to produce. For commercialization, QS needs to find a way to stack more than 100 on top of each other to create a battery package. What I'm saying is that while QS has beaten everyone and solved a major science problem, what lies ahead is an equally hard engineering problem. The good news is that they have VW. VW’s production expertise should smooth the path to commercialization.

I'm very optimistic about QS and think its stock is a great long term bet. Its batteries have a big shot at propelling the next generation of electric vehicles, but sustaining that $50B valuation will prove much more challenging than the advanced battery science. So, if you're an investor, tighten your seat belt because you're in for a very wild ride, and too many swings in the short term.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.