Summary
We initiate 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. We believe 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, we believe the timeline to achieving it is more uncertain, using less commoditized separators and incurring larger manufacturing challenges.
Long path to validation and commercialization
We believe 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, we expect 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, we are modeling 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. We also don’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, we forecast 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 wellestablished 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. We believe 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, we see 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, we see large downside risk towards just 0.65x 2028 revenue, more in line with its startup battery peers, suggesting downside to $10. We apply a 70%/30% likelihoods to these 2 scenarios to derive our $20 price target.
Opportunity to disrupt massive market
Inflection point for EV adoption across the automotive industry As a developer of next-generation electric vehicle batteries, QuantumScape is positioning itself to disrupt the battery technology landscape. With about 90m+ vehicle units produced by the industry in a normal year, total TAM for vehicle batteries represents at least $450bn annual sales opportunity, once EV penetration reaches 100% of light vehicle production. In the short term, the company’s SAM directly reflects that of BEV penetration of new vehicle production, which sits around 5-6% as of year-end 2021 (or ~$25bn in annual sales). Furthermore, QuantumScape is looking to commercially deploy its technology in the 2024 timeframe which should align with clear acceleration in EV penetration across the globe.
As we look forward to the rest of the decade, we expect BEV adoption to pick up considerably in the years ahead, forecasting about 20% penetration of full BEV vehicles on total light vehicle production by mid-decade. By 2030, the penetration rate could accelerate to >47% (43m units annually). We think this transition will largely be driven by China and Europe in particular, reaching 43%/25% penetration in 2025, respectively, and 81%/70% by 2030.