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QuantumScape
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== Summary == Deutsche Bank initiates coverage of QuantumScape with a Hold rating and $20 price target. The company is taking a thoughtful approach to developing solid-state lithium metal battery technology, which offers significant advantages over current li-ion batteries for the automotive industry and could enable QS to disrupt the market if successful. It has also secured large investments from Volkswagen and partnerships with 3 other global automakers, providing a solid path to commercialization once the development is complete. At the same time, QuantumScape still needs to demonstrate it can scale up its technology and solve large technical challenges ahead, and even if all goes according to plan, the company is still several years away from mass manufacturing and even further from monetizing it. '''Technology advantage''' QuantumScape’s battery cell, which uses anode-less lithium metal battery technology and a solid-state separator, promises to offer superior performance than traditional lithium-ion batteries, including longer cycle life, better vehicle range, performance in wider temperature ranges, faster charging speed, and improved fire safety. Deutsche Bank believes this should be of interest to automakers, which are under pressure to electrify their entire portfolio, and looking to improve performance and bring down cost of EV powertrains. While QuantumScape believes its batteries will also be cheaper to produce, with no anode, Deutsche Bank believes the timeline to achieving it is more uncertain, using less commoditized separators and incurring larger manufacturing challenges. '''Long path to validation and commercialization''' Deutsche Bank believes QuantumScape’s eventual success hinges upon its ability to validate the performance, safety, and most importantly, manufacturability of its battery technology. While performance demonstrated so far has been good, the company has only showcased cells with few layers. This year could be pivotal, as QuantumScape attempts to develop larger cells, produce an A-sample for testing by at least one customer, and take delivery of manufacturing equipment to be calibrated for manufacturing. If this year’s milestones are successfully completed, the company will look to start production of the next stage of prototype, B-sample, on its initial manufacturing line – a prerequisite for pilot commercialization in the 2024/2025 timeframe. '''Ramping up scale''' Assuming all tests and validations are successful, Deutsche Bank expects a small amount of cell production during the pilot phase of 2024-25, and expansion to 4.5 GWh in 2026. With the addition of the QS-2 production line in 2027, Deutsche Bank is modelling production of 26GWh and 56GWh for 2027/2028 and ramping to 91GWh eventually by 2030. This is more conservative than company’s plans to ramp up QS-2 line alone to 70GWh by 2028, to account for delays and uncertainties on the timeline of the manufacturing scale. Deutsche Bank also doesn't expect the company to reach positive gross margin until 2026, EBITDA until 2027, and free cash flow until 2028. If all milestones are reached, Deutsche Bank forecasts 2028 revenue of $4.1bn and Ebitda of $667m. '''$20 price target based on probability of 2 scenarios''' With an enterprise value above $6bn representing 1.4x EV/2028E revenue of $4.1bn, QS’ multiple is already almost in-line with the average of its well established li-ion battery peers such as Contemporary Amperex Technology (CATL) and LG Energy Solutions, and considerably above that of its pre-revenue startup battery peers. Deutsche Bank believes QS' stock performance from here will reflect perceived likelihood of success with its technology validation and ramp up, and therefore be heavily influenced by results of testing and ability to hit technical milestones. If QuantumScape successfully delivers on those, Deutsche Bank sees room for its valuation to reach the high-end of established li-ion battery peers due to its potentially superior technology, at 2x 2028 EV/sales which would suggest upside to $24. Conversely, if the company’s development plans start facing complications, delays or loss of momentum, Deutsche Bank sees large downside risk towards just 0.65x 2028 revenue, more in line with its startup battery peers, suggesting downside to $10. Deutsche Bank applies a 70%/30% likelihoods to these 2 scenarios to derive its $20 price target.
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