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Investors went crazy for electric vehicle (EV) and renewable energy stocks in 2020 and 2021. Dozens of startups in these sectors went public several years ago through reverse mergers with special acquisition companies, or SPACs. Most of them have now failed or fallen significantly from their IPO prices, going through a classic boom-and-bust cycle. Now they are in a state of bankruptcy.
quantum scape (QS -9.01%) was the classic bubble stock of 2021. At one time, the battery technology startup had a market capitalization of $50 billion. It has never generated any revenue. Today, the stock is down 94% from its peak and its market capitalization remains at a relatively modest $4 billion as investors grow tired of money-losing EV and renewable energy SPAC stocks.
But is QuantumScape an opportunity for today’s contrarian investors? The company is making significant progress with its innovative solid-state batteries and could soon reach commercial production.
Advances in battery technology
QuantumScape was founded in 2010 by Stanford University professors who wanted to revolutionize the field of battery technology. Since then, the company has focused on manufacturing solid-state batteries for electric vehicles. Solid-state batteries are different from lithium-ion batteries, which contain liquid electrolytes, and are currently used in electric vehicles. Without getting into the technical details, solid-state batteries may have higher energy density than the batteries currently in use. The promise of this technology is safer batteries with longer life and faster charging.
The problem is that producing commercially viable solid-state batteries has proven incredibly difficult for companies that have tried in the past. But after nearly 15 years of research, QuantumScape may finally have cracked the code. The company recently shipped prototypes of its solid-state battery to the following automakers: volkswagen group, and clearly these prototypes exceed performance goals in testing. Automakers are hoping to get solid-state batteries, which could theoretically give EVs a range of 1,000 miles on a single charge, significantly reduce charging times, and help make electric vehicles more popular. Two of the major obstacles to expansion would essentially be removed.
Although the company’s batteries are not yet in commercial production, QuantumScape appears to be on the verge of making the solid-state dream a reality. There could be a financial windfall, especially if QuantumScape is the only company able to crack the code in the short term. Batteries are the most expensive part of an electric car’s production, costing him between $4,000 and $20,000 per vehicle, depending on size. If QuantumScape sold 1 million EV batteries each year at an average price of $5,000, the revenue would equate to $5 billion.
QS Free Cash Flow Data by YCharts.
Stock is down, is it cheap?
QuantumScape clearly has a lot of potential. However, investors need to be cautious with this stock. Recall that the company currently has zero revenue. With significant research and overhead costs, the company generates approximately $350 million in free cash flow annually. Even after raising a significant amount of money through the SPAC merger, the company still has more than $1 billion in cash on its balance sheet, meaning it has several years left before running out of cash. So while there’s no need to worry about QuantumScape going out of business tomorrow, the company needs to demonstrate that its solid-state batteries are practical for automakers within the next year or so.
Once QuantumScape proves its solid-state battery can be used commercially, the next step will be to ramp up production. That’s obviously good for business, but batteries are expensive to manufacture and there are large fixed costs to start.Please take a look tesla In the early days of mass production. In a year, he was burning through more than $5 billion in cash flow until he reached enough scale to start generating positive cash flow. Expanding manufacturing would require QuantumScape to take on significant debt and/or raise funds through an equity offering. Whichever option is chosen, there will be headwinds to creating value for shareholders.
Investing in QuantumScape involves many risks. Nevertheless, there are still plenty of advantages to this potentially revolutionary company. If you want to buy stocks this year, make them a small position in your portfolio. That way, if your company fails (which it does), your losses will be minimal. But if it is successful, you can still participate in the profits.
Brett Schaefer has no position in any stocks mentioned. The Motley Fool has a position in and recommends Tesla and Volkswagen. The Motley Fool has a disclosure policy.
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