QuantumScape Corporation

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 2/5

QuantumScape is a development-stage company focused on solid-state lithium-metal battery technology for electric vehicles, aiming to overcome the limitations of conventional lithium-ion batteries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

QuantumScape (QS) is primarily engaged in the research and development of solid-state lithium-metal battery technology for electric vehicles (EVs). The company was founded in 2010, and it went public through a SPAC in 2020. While it has no commercial revenue, it is focused on revolutionizing battery technology by creating batteries with greater energy density, faster charging times, improved safety, and longer lifecycles than traditional lithium-ion batteries.

Revenue Distribution: Currently, the company has no revenue from commercial operations. Their revenue is driven by:

  • Development-related revenue: For the year ended December 31, 2022, the company recognized $31 million of “revenue related to government contracts”, as compared to $1.3M in 2021 and no revenue in 2020. This revenue is not from product sales, but rather reimbursement for costs associated with the company’s battery development.
  • Interest income from investments: The company has cash investments to help fund its R&D and these funds generate some income through investment interest. This is not operating income but a supplement to other revenue.

Industry Trends: The electric vehicle industry is undergoing significant transformation, with conventional lithium-ion batteries starting to reach their limits. There is an increasing need for batteries with improved energy density, faster charging times, and improved safety. Solid-state battery technology is one of the most promising areas in which to meet these growing demands. As a result, most automakers are racing to develop more efficient and better batteries in order to gain a competitive advantage, and the same time increase their EV sales. It’s also important to note, that the supply of some raw materials is also in a crunch that may lead to high prices and slow EV productions.

Margins and Financials

With no commercial revenue yet, the company faces difficulties in its margins and financials. -Margins Since it does not sell products, it has no margins to calculate. Its main source of income is from contracts with government entities. -Financials: The company is currently burning through its cash resources to keep the operations going. It is highly reliant on financing and will probably require more of it in the future.

Competitive Landscape:

  • Competition: The battery industry is intensely competitive, with numerous companies working on similar technologies, such as CATL, Samsung SDI, and LG Chem, among others. These competitors are more well-established and have significant resources at their disposal to beat QS. This means that QS has to work extra hard to develop its technologies faster and bring them to market.
  • Unique Characteristics: QuantumScape’s solid-state lithium-metal technology is different, from conventional lithium-ion technology, and that could give it an advantage if their technology works out in its performance goals and they are able to achieve commercial production at a large scale. They are also in a partnership with Volkswagen, which makes them a top-tier battery manufacturer.

Moat Analysis

Moat Rating: 2 / 5

QuantumScape’s moat is difficult to assess as they are still in the development phase and haven’t commercially validated their technology. Here’s a breakdown:

  • Intangible Assets (Brands, Patents, Regulatory Licenses): They are seeking protection for their technology with patents, which do provide an advantage against the competition. But their technology hasn’t been proven at scale, making the value of these patents speculative. The brand has no value since it’s not a producer of a popular product. Their regulatory approval is also minimal, which is another negative factor for their moat. This gives them a bad rating in intangible assets.
  • Switching Costs: As a battery producer, there are no switching costs, and it is easy to replace their product if better options exist. This means that they are vulnerable to competitors with superior technology. This gives them a bad rating in terms of switching costs.
  • Network Effect: There is no network effect involved in their business that would make their battery’s better. The battery market is highly competitive and network effects are not in play.
  • Cost Advantages: The company has yet to demonstrate a substantial cost advantage. They are, right now, very far from scaling up production or providing a cheaper alternative than conventional lithium-ion batteries. Therefore, they have a bad rating in this section as well.

This leads to a rating of only 2 out of 5. If they are able to prove their technology, their patents could solidify the moat, but that is still a long way from here.

Legitimate Risks and Business Resilience

Risks:

  • Technological Risk: The success of the company’s business model is completely reliant on the success of their battery technology. Failure to make their technology work, or the failure of making it at a cheap cost could bankrupt the company. There are a lot of risks with emerging technologies, and solid-state batteries are very new to the market, which makes the business very risky.
  • Competition Risk: The company is going up against many well-established large-tech players in the market, with more financial strength, resources, and know-how to win in this market. It remains a big risk for QS.
  • Financial Risk: As a company with no product being sold to consumers, QS is burning through its cash reserves. It is highly reliant on outside investments and is already losing a lot of money. It may not be able to raise more money in the future, and could be forced to scale back R&D efforts or even go bankrupt. This makes the company highly susceptible to financial risk.
  • Scaling & Manufacturing Risks: Scaling the production of solid-state batteries is difficult, especially with new manufacturing processes. A lot of technical problems have come about with their technology, which they will need to overcome before they can mass produce these products. Even if the technology works, the cost of manufacturing at scale may be too high to compete with the incumbents.
  • Market Adoption Risk: Even with a solid product, the adoption by the EV makers is not given. It would take a lot of time to market and get approvals from automakers before these products can be installed on cars, making them face significant market adoption risks.

Business Resilience:

  • Because their technology is still under development, and the revenue is essentially 0 at this moment, they do not have any business resilience for the moment. All their capital comes from financial markets, who have very limited information on their actual business operations and the prospects of their success in the future.

Recent Concerns and Controversies

  • Past performance: There have been very few updates about the success of their technology, or real-world testing of the cells. Their timeline has been pushed back quite a bit. This could cause investors to worry if their technology can be commercialized at all. The company has also failed to show success in the timeline, and most of their operations remain vague.
  • High Cash Burn: The company continues to burn cash at a high rate and might not be able to continue for a long time if a solution is not found.
  • Lawsuits: QuantumScape is subject to securities class action litigation, which is never a good sign for investors. The lawsuit is about the company making misleading statements and not being able to deliver the technology that was promised in their projections. In fact, the lawsuits have made the stock extremely volatile and has greatly lowered its value in recent times.

Financials In-Depth

Balance Sheet

  • Cash and Equivalents: The cash reserves have been drastically reduced, having only $130M in cash and cash equivalents, compared to more than $900 million just a few quarters ago.
  • Goodwill and intangibles: The value of goodwill and other intangibles has been consistently rising because of their acquisition of several businesses. However, the overall value has not grown and has been stuck near $2 Billion for the past few years.
  • Liabilities: The company’s total liabilities have consistently increased, to around $1.5 Billion in their latest earnings report. This is due to debt raises from investment companies to fund operations.
  • Shareholders’ equity: With the company burning through cash and not showing any significant growth or revenues, the equity has continuously been decreasing, at around $450 Million in the latest earnings reports.

Based on this analysis, the balance sheet is definitely weak, and it continues to worsen with the high cash burn. The company is heavily leveraged to finance its operations, which makes it vulnerable to economic hardships. This puts the balance sheet health at 2/5. Income Statements

  • The company has a very low revenue base that comes from research grants that are unreliable. However, they have no product sales. Operating expenses have been decreasing slightly over the past few years, but remain over 3x of their revenue.
  • This has resulted in heavy losses, as the company’s net income has always been negative over the past many years, and it has widened recently.
  • The company remains in research and development mode and it has a long way to go before it can be profitable.

Cash Flow

  • The company has a very negative cash flow from operations, mainly due to its losses.
  • They have to rely on financing activities to continue their operations.
  • They also have large capital expenditures that consume its cash resources.

Overall, their cash flow statement shows that their operations are heavily reliant on outside funds, and there is no positive cash flow from operations. It is a big risk, and the business does not have good financial health.

Understandability

Understandability Rating: 4 / 5

The concept of solid-state batteries and their benefits is not that complex to grasp for the general public, and many other battery technologies are in development. However, the inner workings of these technologies are complicated and it is difficult to predict which companies will come out successful. So, a laymen investor may not understand the science behind the technologies, but it can have a general idea of their business. For these reasons, I will give the company a rating of 4 out of 5.