Should You Buy QuantumScape While It’s Under $7?

Electric vehicles (EVs) are poised to revolutionize travel. However, like any market technology, EV batteries have a way to go before widespread adoption is commonplace.

QuantumScape (QS -1.04%) is a company at the forefront of battery innovation. Its mission is simple: to overcome the limitations of modern lithium-ion battery technology and pave the way for a cleaner, electrified future. The company made headlines earlier this year when it tested positive during an endurance test and recently secured funding to expand its track for a few more years.

With such developments, is now a good time to invest in the EV battery company? Let’s get down to business to find out.

Promising QuantumScape Battery Technology

QuantumScape took the market by storm following its initial public offering (IPO) in November 2020. Investor enthusiasm for an electric vehicle-powered future sent the stock soaring to a staggering $132 per share in just a few short months as optimism for an electrified future has reached a maximum level.

Investor sentiment and hopes were raised based on QuantumScape’s promising technology. The company aims to overcome the limitations of modern batteries. It develops state-of-the-art lithium batteries for electric vehicles with higher energy density, faster charging and increased safety.

A significant obstacle to the widespread adoption of electric vehicles is their limited range. QuantumScape claims that for electric vehicles to truly compete with traditional internal combustion engines, they must deliver at least 300 miles per charge.

Electric vehicles have quickly approached this range. According to a Bloomberg analysis, US automakers’ average lineup of electric vehicles rose to 291 million, about a third higher than the global average. However, electric vehicles still have a long way to go before they reach today’s average 413-mile range of gasoline-powered vehicles.

Image source: Getty Images.

The next few years are crucial for QuantumScape

Volkswagen has thrown its weight behind QuantumScape, investing nearly $300 million in the start-up and creating a 50-50 joint venture to help it reach industrial-scale production.

Earlier this year, Volkswagen PowerCo completed an endurance test of the QuantumScape’s solid-state battery, in which it “successfully completed more than 1,000 charge cycles” and noted that it “could go more than 500,000 kilometers without any visible loss of autonomy”.

However, QuantumScape still has its work cut out for it, which is why the stock has failed to gain traction for several years. That’s because the company is still ahead of revenue as it develops its technology and prepares to ramp up production. Expenses continue to rise and continue to burn cash. Over the past 12 months, the battery maker posted a net loss of $468 million.

QS Net Revenue (TTM) data by YCharts.

The company is nearing production and recently entered into an agreement with PowerCo to industrialize its battery technology. The deal gives PowerCo the license to mass-produce batteries based on QuantumScape technology. PowerCo can produce up to 40 gigawatts per year, with the option to expand to 80 gigawatts per year. This would be enough to power one million vehicles a year.

The deal helps QuantumScape expand its runway, thanks to an upfront payment of $130 million in royalties from PowerCo. It also allows it to use a low-capital business model and reach gigawatt-hour scale faster under its previous deal, and should extend its cash flow by 18 months to 2028.

Is QuantumScape right for you?

QuantumScape is an exciting company with huge potential. However, it faces stiff competition from other battery technology developers at Toyota and Nopeand is still in the pre-revenue stage and years from generating profitable cash flow. Because of this, it is a high-risk, high-reward right now, high-risk stock best suited for investors with a very high risk tolerance and a long time horizon.

The stock will continue to experience volatility and is not an ideal holding for most investors. However, if you’re intrigued by its long-term prospects, keep it on a watchlist and see how it progresses as it advances to industrial scale — which should provide more clarity on its path to profitability.