QuantumScape; Big plays, little batteries, & a Catch-Up Conquest
DISCLAIMER
This is in no way, shape or form, fluid and function, an analytical, qualitative or intelligent compte rendu. I am obviously not rich, so obviously I haven't made it with my own thinking, so definitely don't put faith in me. But maybe read and learn some things about a company that might just seal the deal on putting the buzz in the beetle.
Thesis
This is the catch up play. When ARK came out giving Tesla a $3000 valuation, they stated that it would cost any other company $5-10 billion dollars to catch up to Tesla. QuantumScape is that catch-up cost. Only it didn't turn out that clean. I think in Volkswagen's head: throw some money into QuantumScape, let them bare the burden of trial and error, and then when it works, acquire. And in a turn of events that can only be described as appropriate for Volkswagen, the market disagreed. I have no idea what kind of madness drove this to $130, giving QuantumScape a market valuation greater than Ford, but hey, capitalism. Volkswagen has 3 people on QuantumScape's Board, and Tesla has 2. Can you imagine getting caught by the market trying to acquire something so easily?
My general outline of QuantumScape is this; perfectly valued around $5-10 billion to be acquired within the next year, and that’s the best spot for QuantumScape to be in. While their technology is breakthrough stuff, and their company is extremely impressive in performance and foundation, any valuation over $20 billion within the next year is strenuous at best. I think that the market is right on the money with QuantumScape being worth the capital allotment, and that this company is currently valued perfectly for the long term. Keeping an eye for impulse waves leaving the $7-13/share is probably a good time to make a market play.
QuantumScape is an impressive specimen of a start-up. The trio of founders have done an amazing job going from theoretical to actual to practical. I would even keep Jagdeep Singh on a list to follow, if anything, after this. QuantumScape knows perfectly it's position, purpose and path; it started as a company for patent proof and sale. While their battery technology is impressive, giving them anything more than a 5 year lead time in product development is iffy at best; with a crowded field of competing battery technology developers, and an upper management perspective that their technology is the best there will be for lithium solid state batteries is tricky, especially when I read an article today using a different ceramic mix giving a better lifespan through 10,000 lifecycles. The truth of the matter is QuantumScape did their job, they made the tech work, and are now positioned perfectly to be acquired by one of the big Auto companies trying to catch up to the development cycle of Tesla and it's true peers. If QuantumScape goes for $10 billion, which seems a fair value, especially with the market capitalization of VW being ~$80-100 billion in their current cycle (although it looks primed to change at any moment for those OTC traders), Singh gets a $3 billion payday, and the rest of the board becomes insanely wealthy and well positioned to do whatever they want to do for the next few lifetimes.
I know this is going to upset a lot of investors and readers, and I want to press this upon you; You weren't wrong in thinking QS is a winner, and you may have valid reasons for believing the company is worth $50+ billion, but just hear me out; Ford and BMW just invested $130 mil into Solid Power, another SSB start up. QS may have the best technology the closest to market, but it is a crowded technological space and a short market run-up. Aside from that, they are limited into the research of lithium solid state batteries, so should a different technology present itself of a different material, they have only the same expertise as the rest of the crowd. The truth of the matter is this; QS was on some strange pump and dump, it got shorted hardcore, but the likelihood of it getting back up to $130/share is small. On the outset, a valuation of ~$25/share, or ~$10 billion was probably a fair outcome, but with the dangers of FOMO investing, bag-holding is always an outcome (my arms are buff from all my bag holding). As always, this analysis is done at a snapshot, so they may have transitioned in a big way at a date post 5/16/2021 (date of publication), that would suggest otherwise.
My hypothesis on why QS blew up is a mix of option exercise by Insiders, a gamma squeeze caused by YOLO options and the following retail frenzy being unsustainable as early investors took their massive gains and moved on to their next Ventures. I see QuantumScape as a great company with an All-Star cast and crew, a potential breakout star CEO depending on following moves, a massive win for Science and Mother Earth, and a potential swing-trading option to keep in the book for the more active investor. That is, until an eventual acquisition by VW for a modest sum.
Technology
QuantumScape makes solid state lithium batteries, which is definitely a technology all on its own, but not necessarily theirs. Theirs is the material used in the SSB (solid state battery), which is a novel ceramic that fixes many of the traditional issues of a lithium battery, while allowing the scaled manufacturing of Lithium SSB for rapid use in evolving electric technologies (primarily EV), but with a much, much greater market potential. As the ceramic is proprietary, I cannot go into detail about the specific technology, and I don't really have a proper way to weigh it against competing technologies. Furthermore, I have no idea how special their ceramic tech is, or if the concept of a ceramic is the novel idea and competitive follow-up with be rampant. Furthermore, I know nothing about batteries. I don't know to explain or even think about circuits. The heart is a muscle, not a circuit (RIP), and that is about it for me. Explaining this will be rough, but I aim to try. For those who want the experts to do it, start with the basics here: www.explainthatstuff.com
Let's start with the simplest battery example from the link: A glass of very salty water, a zinc nail and a copper coin (fairly common and inexpensive reagents). Attach them to a small LED light (like say from a broken toy where the LED can be easily pulled out, or those junky little flash-lights that die after 5 minutes of use), and voila, a battery! The functional explanation is that electrons travel from the zinc nail through the wire (and light) to the copper penny. The copper penny is the cathode, where electrons are pulled by free hydrogen (hydrogen and oxygens bond is weakened due to the competing salt), which becomes little hydrogen gas bubbles. The electrons in the copper are "refilled" by the Zinc, which is in a neutral stage, but gives 2 electrons rather freely if asked, through the wire, and straight back to the Copper. The Zinc on the nail changes to Zinc^2+, which is to say that has a positive charge caused by the loss of 2 electrons. The salt-water is the electrolyte.
In the case of a lithium battery, the anode is a lithium-compound (not just pure lithium) , and many different metal and materials are the Cathode. The electrolyte is usually a lithium mix as well. In a solid state battery, this electrolyte is a solid lithium metal. The biggest issue with these is seen with the Zinc. As the zinc donates the electrons, it goes from being a singular metal block (as in the nail), to Zinc2+ ions that will enter solution before, eventually, depositing itself on the copper penny (which is also why Copper pennies have the green zinc rust). This is terrible for battery performance, and as more Zinc leaves the nail, and deposits on the Copper penny, it loses it's efficiency and total charge. That is to say, that the total amount of neutral zinc capable of donating electrons is lost, thus the overall charge of the battery is lost. In the case of a lithium battery, the lithium metal deposits quickly on the cathode, giving it a very short lifetime. The solution has been to encase the lithium metal in something that prevents it from depositing on the cathode, but is still able to have the electrons transferred to it in a quick and efficient manner. All current lithium batteries are not using a lithium metal, but a lithium mixture to try and limit this unwanted effect, but to great detriment of the total charge, and still a massive issue in the depositing ions.
Enter QuantumScape, who use a proprietary ceramic to serve as the solid layer between the lithium and the cathode. Check out the wiki (en.wikipedia.org) towards the bottom for a picture that illustrates the "dendrite formation" of the lithium anode/electrolyte. With the separator being a solid ceramic with extremely conductive properties, i.e. allowing the electrons through.
The Float/Investors
The float is 129 million shares, but with a massive amount of it tied up between VW and Insiders (the CEO has 14.9% of shares and has already promised not to sell until batteries are in cars - and he should never sell as it would be stupid and dilutive to his own fortune- keeping the price high gives them leverage for an M&A with VW, giving themselves a higher price and a very real, and secure, cool billions-same as the rest of the insiders, it would not be financially smart to sell at market), there really is a small float to play with.
fintel.io
By my count, (VW+Insiders only| 28.52+14.9+7.4+6.6), 57.4% of the float is firmly secure. Furthermore, the short % is 23.87% at 30.8 million shorted shares, with a 54% increase from last reporting date, which means they have had ~2 weeks to cover from that point, which is definitely possible, but extremely unlikely. Theoretically, if the rest of the float holds, including those that bought the shorts, then a major squeeze could happen. But shorts don't need to buy 100% of the float, only the 24% they sold, and there is little fundamental reason to suggest the stock deserves a higher price, so I would rate a massive short squeeze to be unlikely. Short squeezes really need to be caused by major catalysts, as in some major news that would suggest an emerging market capitalization greater than the current short sold price within a brief period. Even if there is a massive amount of volume, and the price goes to ~$50 again, I wouldn't be convinced that a lot of shorts would cover, as the rest of the impulse series is likely to be diminutive like the last series, bringing the price back into the proper channel. I definitely think a short squeeze can occur, as any massive buying pressure would be from a very limited float, but the truth is that buying pressure would have to be synthetic, as in not a natural fundamental increase in asset worth.
shortsqueeze.com
Whalewisdom backs this story (whalewisdom.com) as we see a massive share stake by the Venture Capitals and the Insiders listed just before 2021, no changes to these yet but I would be extraordinarily surprised to not see any VC remove a massive portion of their stakes. When sorting by the large decrease in shares, we see a lot of investment firms closed out their ownership % (or a massive amount of it) during the last few months as the drop from ~$130 correlates with this. In the most recent buys we see Blackrock and Vanguard, likely for their ETFs, suggesting they believe the stock is in a solid price range within $30-50 (price from March to May), which is on the high end of what I might value this (but I aim to be conservative on price prediction to limit my own stupidity). While Blackrock and Vanguard are massive groups with people much more knowledgeable than I, they are not infallible, and I just fundamentally disagree with their price estimates, but I am also not infallible.
Bear Theory
The ultimate bear theory is this, it took a while for QuantumScape to finally get going, it has taken them a lengthy period to get to near-prototype fuel cell layering with another 6.5 months being the lead time for a true prototype fuel cell for EVs; the company is an obvious success, they are meeting every mark and are going to deliver the product in the time allotted. VW is going to push to acquire eventually, QS accepting or refusing is definitely grounds for its own bear theory, but QS will be worth billions.
But how long until the next company pops up with the same or better results? How long until the crowded space comes to a head with the list of champions beginning to starve the weak? How long until VW looks like just the first to adopt rather than the ones to beat? QS could be worth 1,2,5,10,20 billion dollars, but as time extends on, that valuation becomes more and more uncertain. Ford doesn't need the best batteries, nor does anyone else, so market value falls down to the value of a (max)-5 year lead time in battery technology.
Bull Theory
The entire company is a bull theory. I am upset that this one got valuated so damn well right off the bat, because I would love to put the long suggestion on QS. The company doesn't just look damn good, it runs good too. With the corporate structure of QS, as well as the directors and co-founders being primarily scientists, it is safe to say Science got paid! I genuinely wish QS wasn't on a path to acquisition, as I would love for them to become the norm with investor interaction. I have read too many Investor Relations pages with barebones baloney and the same ads they put on TV. QuantumScape plays it different, pushing science as the narrative, and perhaps teaching investors just a little bit about the technology, the field, and the science. I advise running through some of the presentations on their site, as it is a joy to see Science being the investor relationship!
ir.quantumscape.com
While I believe the zero pressure and consumer sized production will be profitable, and scientifically relevant, the risk of competition favours the VW acquisition end…
Acquisition by Volkswagen as Plan A
I believe VW fully aims to close the partnership, swallow up QuantumScape and just keep the staff on as the EV battery arm. On one hand, they need an electric vehicle battery supplier, they have a massive stake in the most commercially developed end and they have competition from intra- and inter-sources to acquire the company. On the other hand, you have access to a stream-lined company plug-in with an amazing board of directors, management and engineers, product specialists in building batteries, which will be technology proof. Your in house staff clearly aren't cutting it, and no matter how close a bond you try to knit to something you don't own, one day QuantumScape will go from cooperator to competitor. The best thing VW can do now is to finalize the acquisition at a low price, integrate the brand, board and business.
My logic for this play:
Acquiring QS is a smart move, it boils down to money. Even if VW is unsuccessful in rotating to the EV sphere, having the lead EV battery manufacturer as you secures your legacy and name, giving you time to get the car line together. Selling batteries to the Porsche conglomerate, and as a stop gap to their own technological fruitions, Ford et al will buy.
24% Stake that has not decreased through the massive climb, and with more fingers in the company than anyone else, VW not selling means it values QS more than the profit.
Joint Venture Pilot-Line Facility - finance.yahoo.com
Likely to be the final step in making QS and VW one; potential to keep the QS brand separate means easier sell to competitors and separation from VW and profitable Lithium SSB manufacturing business.
Makes everyone the happiest - sometimes the simplest answer is the right one, and this happens to be the simplest. The co-founders become billionaires with freedom from entanglement, whether business or pleasure. VW is happy. Porsche is happy. Removes possibility of competition getting higher quality batteries. VW doesn't really have any R&D to bring to the EV table, which means all they have is brand name. QS is their R&D.
CEO Singh recently stated he would not sell any shares until the first production battery goes into an EV, or something to that effect. This is a blanket bull statement, and a big no-brainer, but it rings a little bit more than just that to me. It sounds more like a desperate plea right now. If Singh has some doubts about his willingness to be acquired, it rests on the market believing QS is more than just VW. If Singh doesn't have doubts, than it’s a simple matter of bargaining. VW needs to acquire the last 76% of the company, they can go to the share-holders, or they can go to the market, either way if they want VW, they will get it. Promising investors a $10-20 billion instant profit is better than leaving the milkshake in the yard and risking a hold on the market.
Again, ultimately how the acquisition plays out, whether ending in VW getting a steal (thanks shorts) or Singh walks away (oof), I have no doubt that this is the best step all interested parties can take.
Disclaimer
I am going to be real honest with you; congratulations for getting to the end. Thank you for your time, I hope it was worth it. If you have any suggestions, I would love to hear it. Please don’t make an investment decision on my information alone, always double check. I am not a financial analyst, I do not get paid to write any of this, and I do not currently (5/16/21) have an investment in QS or it's stock price. Thanks.
