When QuantumScape (NYSE:QS) reported quarterly results on July 27 after the market closed, QS stock briefly rallied before giving back gains.
The loss in the quarter will not move QS stock meaningfully for now. Investors instead are digesting the company’s progress in battery advancements from here.
Look at QuantumScape’s battery test results in the letter to shareholders. This lays out a clear vision in the company’s solid-state lithium-metal battery technology.
QS said in its shareholder letter that it ended the second quarter with over $1.5 billion in liquidity.
Next year, it will have at least $1.3 billion in liquidity. Shareholders will not need to worry about cost overruns as it scales up battery production. Furthermore, the company will not likely sell stock or issue debt to raise cash.
For 2021, QS expends operations will cost $130 million to $160 million. Capital expenditure is at the high end of plans because of the early progress in the QS-0 pre-pilot line facility in San Jose.
QS announced its factory on Feb. 16. The firm forecasted the costs will cover QS-1 production too, which will have a 1 GWh scale.
In the longer term, QS will deliver prototype samples that are commercially relevant starting next year. By 2023, it will provide cells to customers for research and development test cars.
Shareholders should expect commercialization will begin starting in 2024 or 2025.
A Closer Look at QS Stock
As QS progresses from prototype products to a production-ready battery, it plans its manufacturing at scale. Chief Executive Officer Jagdeep Singh is confident it can scale for two reasons.
First, the precursor materials are earth-abundant. Second, it has tools today that do not require custom tool development.
QS needs to offer a solution that is as good or better than Tesla’s (NASDAQ:TSLA) 4680 lithium-ion battery. Tesla has higher metal content. It uses dry electronic processing for its cathode manufacturing.
Conversely, QS offers those improvements with its lithium metal anode. This results in fast charge and cost advantages when produced.
QS must figure out how to scale production. It also needs to increase its layer count. In Q2, the company tested its first 10-layer cells. It still needs to make and test more cells, gathering more data.
Once completed it may report on the cell’s performance and reliability. Any disappointing figures would undermine the company’s production ramp schedule. This would hurt the investor confidence in QS stock.
The stock market’s bullishness for electric vehicles and batteries may reverse. Euphoria peaked in early January and again in May/June. By early summer, QS shares rallied but failed to break out above $30.
Price Target
Analysts lack bullish conviction in their price target for QuantumScape. Four of the five analysts rate the stock as a “hold” with an average price target of $32 (per tipranks).
J.P. Morgan’s $35 price target is a notable call. The firm used an EV/sales multiple of 5 times and an EV/EBITDA multiple of 21 times 2028 results. This is discounted back at a 10% cost of equity.
The 21x multiple is very aggressive, leaving no room for QS to disappoint markets. Also, 2028 is seven years away. No one has a crystal ball that is clear enough to forecast that far into the future.
In the best-case scenario, investors may expect a break-even quarter starting next year. The company may negotiate another joint project with Volkswagon.
Such deals would lower operating costs. For example, it signed a joint-venture facility development in May 2021. This splits the operating costs between the two firms.
Your Takeaway on QS Stock
QuantumScape is like an emerging biotechnology firm. It is heavily in the research and development phase. Since it does not yet have a product, shareholders are betting on a bright future. An investor may disregard valuations like price-to-earnings ratios for now.
Instead, watch for the company’s market capitalization holding the $10 billion level. This is not excessive, since Tesla is worth around $662 billion and earns a modest profit.
QS shares are not without risks. Markets may grow increasingly concerned with Tesla’s valuation. This could incite panic selling, pulling QS stock down with it.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.