QuantumScape (NYSE:QS) is a company that specializes in developing solid-state lithium-metal battery technology. Their next-generation batteries aim to facilitate the transition to a lower-carbon future by providing higher energy density, faster charging, and improved safety. Considering that QS is on track to achieve its FY28 EBITDA target, I believe there is significant upside potential for investors and therefore recommend a buy rating. The company has shown encouraging progress thus far, and I expect this momentum to continue as management demonstrates their ability to execute.
When analyzing QS’s financials, it’s important to note that the company is still in the research and development phase and is not generating any revenue at the moment. Therefore, the focus should be on their balance sheet. As of 2Q23, QS has $900 million in cash and $67.5 million in debt, resulting in a comfortable net cash position of $820 million. With the additional $300 million raised through an equity offering on August 2, 2023, the total net cash position amounts to $1.12 billion. This suggests a secure financial position for QS, especially when considering their FY28 EBITDA burn rate of $444 million. At the current burn rate, the company can sustain its net cash position for approximately 2.5 years. It is worth noting that improvements in EBITDA can be expected moving forward, which would further extend this timeframe. Therefore, there is no immediate risk of needing to raise more capital.
Unlike the typical cash flow models, assessing the value of QS is slightly different. The key factor in determining its worth is whether the company can achieve commercialization as outlined in its presentation deck. According to the deck, management expects to reach $1.6 billion in EBITDA by FY28. Based on the progress made thus far, I am confident that QS is on track to meet this target. If the company can achieve the $1.6 billion mark and trades at the market’s LTM EBITDA multiple, the enterprise value would be $22.4 billion, with a corresponding market cap of $22.4 billion. Assuming net cash of 0 as QS uses up all its cash, this translates to a share price of $48.9. It’s important to note that this calculation uses the market multiple as a conservative approach, while acknowledging that QS could potentially trade at a higher value.
Considering the lack of balance sheet risk in the near-term, the question for QS revolves around its progress towards commercialization. The results from 2Q23 are promising and indicate that the company is heading in the right direction. QS’s first commercial product, the QSE-5, is a 24-layer cell with a capacity of approximately 5 amp-hours, as announced in the previous quarter. Crucially, the A0 prototype cells have successfully passed safety tests required by a major automotive customer. Manufacturing plans, including the implementation of a fast separator production process, are also progressing as scheduled. This new process aims to increase output significantly in the near term without significant capital spending. The necessary machinery for this production step has been installed, and production is expected to start by the end of the year. Furthermore, a second phase of the separator installation line is planned for 2025 to accommodate increased output. These developments align with QS’s goal of having a large quantity of B samples ready by the end of that same year. Tracking the manufacturing progress is crucial for determining whether QS can deliver high volumes of B-samples for testing and validation.
Another significant development worth highlighting is the advancement in commercialization. QS has successfully delivered high cathode-loading unit cells to various automotive partners, which is a crucial step towards introducing a commercial product. Although the specific partner has not been named, it is inferred from the presentation deck that it may involve select brands. QS’s management has indicated that this level of cathode loading aligns with their intended design for energy-dense cells, which are aimed at commercial use. Additionally, the company is actively collaborating with a potential launch customer within the automotive industry to introduce their inaugural commercial product, the QSE-5. This product has the potential to outperform existing EV cells on the market due to its superior energy density and power capabilities. It can be charged from 10% to 80% capacity in about 15 minutes and has a storage capacity of 800 watt-hours per liter. This cutting-edge technology sets QS apart from its competition and presents an opportunity for automakers to differentiate their EV offerings in a crowded market, offering greater range, power, and faster charging.
The main risk currently faced by QS is any delay in its R&D progress, which could indicate a delay in commercialization. This would negatively affect market sentiments and potentially cause the stock to be rangebound for extended periods. In conclusion, I recommend a buy rating for QS. With minimal balance sheet risks in the near-term, the focus should be on the company’s trajectory towards commercialization. The encouraging results, advancements in manufacturing, and partnerships in the automotive sector suggest that QS is making significant strides towards its goals. I am confident in its ability to reach the anticipated $1.6 billion EBITDA by FY28. Using conservative market multiples, this would result in a share price of $48.9.