Investors must weigh QuantumScape’s enormous potential against the likelihood of realizing that potential.
The most reliable way to build wealth in the stock market is to buy and hold blue-chip stocks that slowly compound over many years. And sometimes, innovative companies can be wildly successful, rewarding intrepid investors who take a chance even when the odds are against them.
Today, investors are hoping to find themselves in that situation with QuantumScape (QS 0.55%). QuantumScape (QS 0.55%) has no earnings or sales, but it’s a crazy story that promises a huge return on investment if all goes as expected. The company’s solid-state batteries could help shape the future of the electric vehicle (EV) industry.
However, some potential risks make stocks more like a lottery ticket than an investment these days. Let me explain the pros and cons of QuantumScape here and help you decide whether the stock is worth investing in.
Development of innovative battery technology
Gasoline cars have been the norm for more than a century, but electric cars are becoming more popular. The need to reduce carbon emissions around the world has opened the door to a large-scale transition from gas to electricity in the coming decades. Battery technology is currently one of the hurdles facing electric vehicles. Today’s mass-produced EV batteries have a maximum range of about 300 to 400 miles, but charging takes much longer than it takes to fill up a gas tank.
QuantumScape wants to build the next generation of the EV industry with its proprietary anode-free solid state battery technology. Essentially, these batteries have a higher energy density, meaning they can fit more energy into a smaller space than today’s batteries. This translates into longer range and shorter charging times, making EVs more competitive against gasoline-powered vehicles.
The company recently shipped new samples of its QSE-5 batteries to automotive customers. This battery can be charged from 10% to 80% within 15 minutes. These customers spend months testing and providing feedback that QuantumScape uses to improve the product.
Broad long-term outcomes
More than 1 billion vehicles are currently plying the world’s roads, and that could rise to 2 billion by 2040, according to a report from AllianceBernstein. If EVs eventually become the norm, solid-state batteries will be a key reason why. With that in mind, it’s hard to deny QuantumScape’s big investment potential.
Volkswagen has supported QuantumScape for many years and has invested more than $300 million in the company. Powerco, Volkswagen’s battery manufacturing subsidiary, has signed a non-exclusive agreement with QuantumScape. The partnership will see QuantumScape generate royalty income and offload a portion of its capital expenditures to PowerCo, allowing the company to expand its capital to fund operations through 2028 .
The Volkswagen Group is the world’s second-largest car company by sales and includes several other brands, including Porsche, Audi, Ducati, Bentley, and Lamborghini. This is a great partner (customer) and does not prevent QuantumScape from selling to other brands.
Still, it’s becoming clear that investors have been waiting for that reward for a long time, and it’s unclear what the final reward will be. The company plans to raise money through 2028, which suggests it is unlikely to generate meaningful revenue for some time — at least not before the business generates cash flow, let alone profits. is not enough.
Additionally, QuantumScape is just one of many companies pursuing solid-state technology. Many car companies have invested in next-generation batteries, either directly or through partnerships similar to QuantumScape’s collaboration with Volkswagen. Ultimately, QuantumScape delivers a wide range of end results. How successful the company will be remains to be seen until the finished battery can be mass-produced.
Millionaire or lottery?
QuantumScape’s current market capitalization is $3.3 billion. It may need to become a $30 billion to $100 billion stock to generate life-changing returns for most individuals. Unfortunately, it’s still too unclear what the company’s final sales and profits will be, or how long it will take. In other words, no one really knows. If it were such an obvious home run, Volkswagen, a company with $350 billion in annual sales, would likely buy QuantumScape outright.
Therefore, for most investors, this stock makes no sense to own. However, if you decide to buy, keep your expectations high and don’t invest money you can’t afford to lose if it doesn’t work out.
Justin Pope has no position in any stocks mentioned. The Motley Fool has a position in and recommends Volkswagen. The Motley Fool recommends Volkswagen Ag. The Motley Fool has a disclosure policy.
