Energy Storage

[gfp927z]

>>> EV Battery Start-Up QuantumScape Is Driven Solely by Promise


Barron's

By Al Root

February 1, 2021


https://www.barrons.com/articles/ev-battery-start-up-quantumscape-is-driven-solely-by-promise-51611918010?siteid=yhoof2


QuantumScape, a battery start-up founded by Stanford University scientists a decade ago, generates no sales and says it won’t have meaningful revenue until 2026.

Yet its stock has rocketed 377% since August—even after a recent pullback of more than 60% from its peak. QuantumScape (ticker: QS), at a recent price of $47 a share, has a market value of roughly $21 billion, greater than all but one auto-supplier stocks trading in North America.

QuantumScape has generated excitement by pioneering a new battery technology. But by any measure, this is an overvalued stock.

But expensive need not mean a price driven skyward by fads, short squeezes, or other forces, as in the case of GameStop (GME). Overvaluation is everywhere in 2021. The better questions are: How do investors make sense of this? And what to do about it?

QuantumScape isn’t the only stock that has ridden a frothy wave of investor exuberance. There are about 50 companies with less than $1 million in revenue and a market value of more than $1 billion, compared with 22 just two years ago. The combined market value of those 50 companies is nearly $200 billion, versus $64 billion for the 22. What’s more, there are more than 90 firms trading for more than 50 times trailing 12-month sales. In 1999, at the height of the dot-com boom, the comparable number was 16.

The figures don’t include those without any sales, like QuantumScape. Firms are being valued at a multiple of sales years down the road.

That’s true of at least five other electric-vehicle stocks that, like QuantumScape, went public through a special purpose acquisition company, or SPAC, last year. “The multiples are going higher and sales further out,” says Bernstein analyst Mark Newman.

One way overvaluation happens is that valuing high-growth stocks can be difficult. It’s easier to compare stocks to peers. That means that electric-vehicle stocks, like QuantumScape, have a Tesla (TSLA) problem, says Newman. Investors will look at the electric-vehicle maker and say, “If Tesla is worth X amount, then QuantumScape can be worth 10% of that,” he says. That’s dangerous thinking to Newman, because people then assume that such a valuation is inevitable.

“‘If Tesla is worth X amount, then QuantumScape can be worth 10% of that. ”

— Mark Newman, Bernstein analyst


QuantumScape CEO Jagdeep Singh tells Barron’s that he leaves valuation to markets and tries to focus on what he can control. We asked him about valuation after the stock had doubled, to $36, around the end of November.

The stock eventually rose above $130. Newman, the only analyst covering the company, says none of his institutional clients are investing in QuantumScape at current levels.

Yet there is serious money betting on QuantumScape. Volkswagen (VOW3.Germany), the Qatar Investment Authority, Bill Gates, Jeremy Grantham, and George Soros’ Quantum Partners are strategic investors.

As is Sun Microsystems co-founder and technology investor Vinod Khosla. In an interview with Barron’s, he made the case for QuantumScape. “EVs will be dominant by 2030,” Khosla says. “The battery will represent 25% of the cost of the EV.” That implies that the battery business will be worth hundreds of billions of dollars in the next decade.

Higher and Higher

The 29 most highly valued U.S. companies with revenue of less than $1 million for the past 12 months.

Company / Ticker Recent Price Market Value (mil) 52-Week Change


QuantumScape / QS $47.27 $21,177 377%*
Arrival / CIIC** 27.80 16,847 179*
Virgin Galactic Holdings / SPCE 42.05 8,436 141
Nikola / NKLA 25.64 7,966 148
Kodiak Sciences / KOD 145.91 7,909 128
Allakos / ALLK 127.89 6,904 74
Iovance Biotherapeutics / IOVA 44.61 6,822 106
TG Therapeutics / TGTX 50.00 6,796 280
Beam Therapeutics / BEAM 89.77 6,228 428*
Desktop Metal / DM 26.32 5,946 163
Allogene Therapeutics / ALLO 34.17 4,626 51
SpringWorks Therapeutics / SWTX 83.93 4,094 119
Immunovant / IMVT 39.64 4,089 152
Fisker / FSR 15.33 4,054 51
Canoo / GOEV 16.21 3,959 59
Lordstown Motors / RIDE 26.45 3,828 163
Apellis Pharmaceuticals / APLS 44.89 3,506 11
Rocket Pharmaceuticals / RCKT 53.59 3,447 139
IGM Biosciences / IGMS 96.80 3,128 144
Workhorse Group / WKHS 32.18 2,978 945
CytoDyn / CYDY 4.66 2,877 307
Axsome Therapeutics / AXSM 72.99 2,822 -16
Karuna Therapeutics / KRTX 99.42 2,756 -1
Hyliion Holdings / HYLN 19.43 2,652 94
XL Fleet / XL 20.81 2,622 108
Stoke Therapeutics / STOK 65.20 2,461 178
Romeo Power / RMO 20.25 2,344 102
Kura Oncology / KURA 32.80 2,277 180
Replimune Group / REPL 39.41 2,070 132


*Price change since firm's 2020 IPO. **CIIG Merger Corp. plans to merge with Arrival and the new company will trade under the ticker ARVL.


Quantum is working on lithium anode solid-state batteries. Solid state means there is no liquid electrolyte common to today’s rechargeable batteries. Solid-state batteries promise better EV range, life, and safety, with lower costs and faster charging time. No one has been successful yet with solid-state lithium anode batteries.

Khosla doesn’t expect Quantum will be the only player, but he believes that Quantum is in the lead. “Is there a competitor that will have a comparable battery in the next five years? Extremely unlikely,” he says. “That gives us the ability to be dominant in the battery market.”

Dominance for Khosla translates into higher-than-average profit margins. If the car industry reaches 30 million electric vehicles by 2030, as Tesla CEO Elon Musk suggests it will, that would add up to roughly $1 trillion in annual EV sales. By Khosla’s math, that amounts to $250 billion in annual battery sales.

After figuring sales, investors still have to decide what Quantum’s market share and profitability will be. With 10% to 15% share of the battery market and above-average profitability, Quantum could be generating roughly $5 billion in annual earnings before interest, taxes, depreciation, and amortization, or Ebitda, by 2030.

QuantumScape, in its SPAC merger presentation, said it expected to earn roughly $1.6 billion in Ebitda in 2028. That isn’t as bullish as Khosla, whose numbers are aggressive but not unreasonable. The largest auto suppliers earn about $5 billion in Ebitda today.

There is a path for Quantum to be a huge success. But there is still risk.

Investors still interested in holding expensive stocks like QuantumScape can do a couple of things to reduce that risk. For starters, they can hold small positions. Position sizing can help sate investors’ need for growth and limit overall portfolio risk.

Another possibility: They can sell covered call options. Selling a call means selling an option that gives the buyer the right to purchase a stock at a fixed price. This may be risky for the seller, but less so if the seller already owns the stock that may be acquired by the call buyer. Some theoretical numbers can help. The option seller might sell for $5 a call with a strike price of $100 for a share trading at $90. If the stock then rises to $110, the seller of the call is out $5.

But if the seller owns the stock, then they hand over a share to the buyer, essentially selling the stock for $105. The seller also forgoes the upside to $110, but if the stock is pricey, they might not have believed it was worth $105 anyway. And if the stock drops, the call seller still has a position in the shares, plus the $5 from the call buyer. Covered call selling requires experience. New call sellers should start small and ask for help.

The philosophical way to avoid overvaluation requires experience, too. Investors need to build up resistance to the fear of missing out, or FOMO—even if the future turns out to be driven by solid-state lithium batteries.

Corrections & Amplifications

In the examples of selling call options, a seller who does not hold the stock is out $5, and a covered call seller foregoes $5 in profit. An earlier version said the call seller without the stock was out $15.

<<<