Quantumscape (NYSE:QS), the lithium-metal solid-state battery company, has a funding hole over the next four years. This could easily drag QS stock down further, despite its miserable performance so far.
That is a depressing prospect for shareholders who have seen the stock deteriorate. It is down 68% year-to-date, and even down $15 from the end of Q1 to $29.48 as of the May 11 close. After earnings last night, it fell a further 4%.
Cash Burning For Four-Plus Years
The earnings really don’t matter though. The company’s original slide presentation, on page 28, shows a long runway before the company will stop burning through cash.
The page 28 slide shows that there is a $3.3 billion cash burn funding hole from 2022 through to 2027. This is seen on the second to last line item showing that free cash flow (FCF) losses, or cash burn, will be $184 million by the end of 2021.
Then there will be $137 million in negative FCF in 2022. Additionally, there will be $169 million, $222 million, and $691 million in the next three years to 2025. This works out to an expected $1.4 billion in cash burn losses over the next four-plus years to 2025.
After that, revenue ramps up, but so does cash burn. The company expects $1.346 billion in negative FCF in 2026 and another $533 million in 2023. That is another $1.9 billion in losses despite significant revenue.
And throughout all of this period, the company says there will be project financing, i.e., higher debt.
Now the last line shows that the losses will be lower if the company does not expand its capacity. But the company has already said it expects to do this. It will need to stay relevant to various original equipment manufacturers (OEMs) and also compete with Tesla (NASDAQ:TSLA).
However, Quantumscape does have cash. The Q1 Quantumscape shareholder letter indicated that “we expect to enter 2022 with greater than $1.3B in liquidity.” This is after Volkswagen (OTCMKTS:VWAGY) ponies up money from its existing warrants in QS stock (assuming they are in the money).
This lowers the funding gap to $100 million to 2025 (i.e., $1.4 billion cumulative FCF losses less $1.3 billion). However, the remaining gap is $2 billion in total through 2028.
What To Do With QS Stock
For all intents and purposes, this is still just an R&D company. It probably came public way too soon. Certainly its $12.1 billion market valuation today is still way too high.
For example, given the $100 million funding gap through 2025 (assuming no downside risks), that implies that shareholders will have to accept another 1% dilution (i.e., $100 million/$12.1 billion). That is not really an issue. Or is it?
The reality is that once it becomes clear by no later than 2023 that cash burn will eat up its cash through 2025, QS stock could drift down 50% lower. Quantumscape may have to raise another $1 billion in order to have a buffer.
Therefore, the dilution could easily become $1 billion on a $6 billion market cap. That will be another 16% (on top of the 50% fall to $6 billion). In other words, the potential downdraft in QS stock could be over 66%.
So buyer beware. The real issue is that Quantumscape needs to revamp its thinking. It needs to figure out how to get profitable well before the end of the next five years. The fact that revenue does not even begin, according to page 28 of the slide deck, until 2024 is also unacceptable for a public company.
Maybe they can make an acquisition, or push forward some way to start selling batteries, or ancillary items. That way the company will not have such a huge funding hole over the next four-plus years. Short of this, expect to see QS stock fall another 50% to $15 or so over the next year.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.