Stocks to sell

Why QuantumScape (QS) Stock Is Still a ‘Sell’ Right Now

QuantumScape (NYSE:QS), a developer of solid-state batteries for electric vehicles, has impressive partnerships and promising technology. Moreover, the valuation of QS stock has become much more attractive than in 2020 or 2021.

Still, given the important drawbacks of solid-state batteries and the many years it will likely take to remedy these issues, I believe that QS may very well go bankrupt before it commercializes its batteries. Also importantly, two of its competitors appear to be better able to survive and thrive.

Let’s take a look at all of these considerations, starting with QuantumScape’s weaknesses and threats.

The Shortcomings of Solid-State Batteries

The biggest disadvantage of solid-state batteries is that, for many years to come, they will be significantly more expensive than today’s lithium-ion batteries. That’s largely because automakers and battery makers will have to build new factories in order to develop solid-state batteries.

Another important factor that will cause solid-state batteries to be more expensive is that they will require “between five and 10 times the amount of lithium for the same battery,” MotorTrend quoted consultant Jordan Lindsay as saying in an article published last month. With lithium already in short supply and lithium prices already quite elevated, buying enough lithium in the coming years to fuel solid-state batteries is going to be a very expensive proposition.

Experts seem to agree that, within 5-10 years, these problems can be solved or at least greatly alleviated. And I think that’s a plausible hypothesis. By that time, researchers will likely find ways to more efficiently build solid-state batteries and automakers will have had time to gradually build factories capable of making them.

Multiple automakers agree with my prognosis. For example, Ford (NYSE:F) doesn’t expect solid-state batteries to be ready for full commercialization “before 2030.”

Also by that time, automakers will likely be able to solve any remaining technical issues. For example, there have been doubts about the ability of these batteries to recharge thousands of times.

For the owners of QS stock or those thinking of buying its shares, the question is, can the company survive without meaningful revenue for another five years?

My answer to that question is: It’s doubtful.

That’s especially the case because two of QuantumScape’s competitors appear to be ahead of it and consequently, large investors may move their money into those firms instead of QuantumScape.

QuantumScape Trails Competitors

In February, QuantumScape reported that “While specific customer testing protocols and results can’t be disclosed, we can report that generally, most cells have performed well on initial testing.”

Conversely, two other startups moving toward commercializing solid-state batteries — Solid Power (NASDAQ:SLDP) and StoreDot — appear to have moved well beyond the initial testing phase.

In January, BMW (OTCMKTS:BMWYY) announced that it’s moving beyond initial tests by preparing to launch “the next phase of joint research and development” of Solid Power’s batteries. Specifically, the German automaker has decided that it “wants to use cell pilot production lines from Solid Power at its own Cell Manufacturing Competence Center, which it opened last year.”

Although Volkswagen (OTCMKTS:VWAGY) and QS signed a deal almost two years ago to find a location for a “joint-venture solid-state battery pilot-line facility by the end of 2021,” I was not able to find any evidence that Volkswagen has taken any steps to actually begin producing QS batteries.

Meanwhile, Vietnamese automaker VinFast has committed to incorporating StoreDot’s “extreme fast charging (XFC) battery cells” into EVs that it will sell to consumers in 2025.  StoreDot is taking a three-stage approach to developing more advanced batteries. That batteries for the 2025 EVs are based on “silicon dominant” lithium-ion batteries whose range can increase by 100 miles with just five minutes of charging.

Given the current, important disadvantages of solid-state batteries, that seems like an excellent approach. Moreover, it’s a plan that will enable StoreDot to generate impressive amounts of revenue way before QuantumScape.

The Positive Aspects of QuantumScape

QuantumScape’s batteries, like all solid-state batteries, generally have “higher energy density, extended battery life, [and] faster charging speeds” than the lithium-ion batteries that power EVs today. When it comes to charging, the range of QS’s batteries can reportedly be increased by 70 percentage points in 15 minutes.

And because of solid-state batteries’ higher energy density, they will take up less space in EVs, enabling them to make the vehicles lighter and consequently drive further on a single charge. On the safety front, solid-state batteries are less prone to fires and consequently safer. Ultimately, solid-state batteries are expected to be cheaper to make because of their smaller size and lack of “anode host material.”

Also noteworthy is that QS has long collaborated with Volkswagen, which is the world’s  second-largest automaker. It says it is also partnering with another, unnamed,  “top ten” automaker.

Finally, QuantumScape’s valuation is much more attractive than in 2020 and 2021. On April 20, QS stock closed at $7.42.That’s more than 90% below the peak of $81.45 that it reached in December 2020 and well over 50% below the $20 price that it reached in March 2022.

If QS stock manages to hang on until QuantumScape commercializes its batteries, its current $3 billion market capitalization could prove to be attractive.

The Bottom Line on QS Stock

QuantumScape’s solid-state batteries could become the wave of the future. However, given the fact that it will likely be many years before its batteries are commercialized, the risk-reward ratio of QS stock is negative at this point. This makes shares a “sell.”

On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.

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