Does Battery Innovator QuantumScape’s Stock Deserve A $20 Billion Valuation?
QuantumScape, a startup developing solid-state lithium-ion batteries for electric vehicles, went public last November, after completing a merger with a special purpose acquisition company. The start-up is now valued at about $20 billion, despite the fact that commercial production of its batteries is still several years away. Does QuantumScape stock deserve such a high valuation? Let’s take a look at the technology and potential to find out more.
Solid-state batteries, essentially replace the conventional liquid electrolyte – which conducts the electric current – with a solid electrolyte. These batteries offer better energy density, quick charge times, longer lifespans, and better safety. While researchers have been trying to build solid-state batteries for decades, they have failed for a variety of reasons. However, QuantumScape claims to have solved the problem. In December, the company released performance data for its technology noting that its cells charge to 80% of capacity in 15 minutes, retain more than 80% of its capacity after 800 charging cycles, and have an energy density of more than 1,000 watt-hours per liter, which is well ahead of commercially lithium-ion cells. 
Investors have been betting big on EV stocks through Covid-19, with stocks ranging from manufacturers such as Tesla to more niche component suppliers such as Luminar, a lidar startup, seeing valuations soar. Now, battery technology forms the foundation of an electric vehicle, and a big battery breakthrough on the lines that QuantumScape is working on could really disrupt the economics and perception surrounding EVs. Considering this, and the fact that there are few publicly listed options in the space, investors are paying a premium for QuantumScape. Moreover, unlike other hot startups that have made big claims about technology and then fizzled out, outside scientific experts have been able to endorse QuantumScape’s technology. The company has also attracted big-name investors, including Volkswagen which has invested $300 million and intends to use QuantumScape batteries in its vehicles.
However, there are real risks as well. It will take years for mass commercial production and there could be several challenges along the way. For perspective, the company expects to post Revenues of just $39 million in 2025, scaling up to $275 million in 2026 and $3.2 billion in 2027.  Competition in the battery space is also intense, with startups and incumbents such as Tesla aiming to make big battery advancements in the coming years. Separately, investors are also booking some profits in the stock, which has seen a significant correction in recent weeks, falling from around $130 in mid-December to about $54 presently, a decline of over 55%. Considering that the company has no real financial track record, the stock is likely to remain significantly volatile.
See our indicative theme of Electric Vehicle Component Supplier Stocks – which includes stocks of companies that make EV components and raw materials for batteries.
[Updated 12/4/2020] Is Luminar A Good Way To Play The Future Of Automobiles?
Luminar (NASDAQ: LAZR), a company that makes lidar scanners – a laser-based technology that is used to detect nearby objects in self-driving cars – went public on Thursday. Luminar had a market cap of close to $8 billion in Thursday’s trading, despite posting Revenues of just about $13 million last year.  So what’s the narrative driving the company’s lofty valuation? Firstly, investor interest in the self-driving market is high, and Luminar is one of the few pure-play stocks in the space. Luminar pegs its total addressable market at about $5 billion presently and estimates that it could grow to about $150 billion by 2030. Secondly, Luminar’s products combine its custom components and related software into a complete package, which should help the company differentiate itself versus off-the-shelf lidar components which are more commoditized. The company has also forged significant partnerships, including deals with seven of the top 10 automakers, and has an order book of about $1.3 billion. That said, there could be some technology risks. Tesla – the most valuable carmaker and the undisputed leader in the self-driving space at the moment – doesn’t use lidar technology, instead opting for lower-cost hardware such as cameras and radar systems, which it says perform better compared to lidar.
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[Updated 10/19/2020] Why Suppliers Might Be A Better Way to Play The Electric Vehicle Market
Investing in the fast-growing electric vehicle market looks tricky at the moment. Pure-play EV stocks have rallied big this year and look overvalued. For instance, Tesla is up 5x this year, while China’s Nio is up over 7x. On the other hand, mainstream automakers who have been slowly transitioning to electric drivetrains could face financial challenges due to the disruption caused by Covid-19. Our indicative theme of Electric Vehicle Component Supplier Stocks – which includes stocks of companies that make EV components and raw materials for batteries – could be a good way to play the growing electric vehicle market, without having to bet on individual brands. The theme is up by about 9% year-to-date, versus the S&P 500 which is up by about 8% over the same period. While Albemarle is the strongest performer in the theme, up by about 30%, BorgWarner stock is down by about -10%. Below, is a bit more about these companies and how they’ve fared so far this year.
Albemarle is the world’s largest producer of lithium for EV batteries. Most electric vehicles are powered by lithium-based batteries and it’s likely that demand for the material will rise as EV adoption grows. The stock is up by about 30% year-to-date.
TE Connectivity provides a range of products including connector systems, sensors, and relays for a range of industries such as automotive, aerospace, defense, and oil and gas. The company has increasingly been focusing on products for hybrid and electric vehicles. The stock is up by about 14% year-to-date.
Amphenol Corporation sells a range of components used in EVs including charging inlets, charge plugs, various sensors, and power distribution systems. The stock is up by about 7% year-to-date.
Aptiv provides a range of solutions for the auto industry, including autonomous driving technologies, safety technologies, components, and wiring. The stock is up 4% this year.
BorgWarner is an auto components and parts supplier best known for its manual and automatic transmissions. The company is doubling down on the EV space, producing electric motors, power transmission, and power electronics for electric vehicles. The stock is down -9.5% this year.
While EV stocks have had a solid run over the past year, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for General Motors vs Comcast.
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