The most reliable way to build wealth in the stock market is to buy and hold great stocks that slowly compound over many years. And occasionally, an innovative company can hit it big, rewarding bold investors who took a chance when the odds were against them.
Today, investors hope to find themselves in that situation with QuantumScape(NYSE: QS), a business with no earnings or sales but a whopper of a story that promises tremendous investment returns -- if things go as hoped. The company's solid-state batteries could help shape the future of the electric vehicle (EV) industry.
However, some potential risks make the stock more of a lottery ticket than an investment today. I'm here to tell you the pros and cons of QuantumScape, and then you can decide whether the stock is worth investing in.
Developing a revolutionary battery technology
Gas vehicles have been the norm for over a century, but electric vehicles are becoming increasingly popular. The need to reduce carbon emissions worldwide has opened the door for a massive shift from gas to electric over the coming decades. Right now, battery technology is one of the hurdles facing electric vehicles. Today's mass-produced EV batteries top out at around 300 to 400 miles of range and still take far longer to charge than filling a gas tank.
QuantumScape hopes to forge the next generation of the EV industry with its proprietary anode-free, solid-state battery technology. Essentially, these batteries have more energy density, meaning they can fit more energy into a smaller space than today's batteries. That translates to longer driving ranges and faster charging times, helping make EVs more competitive with gas vehicles.
The company recently shipped new samples of its QSE-5 batteries to automotive customers. This battery can charge from 10% to 80% in less than 15 minutes. These customers will spend months testing and giving feedback that QuantumScape will use to refine its product.
A wide range of long-term outcomes
Over 1 billion vehicles traverse the world's roads today, and that could grow to 2 billion by 2040, according to a report by AllianceBernstein. If EVs eventually become the norm, solid-state batteries will be a crucial reason why. In that light, it's hard to deny QuantumScape's significant investment potential.
Volkswagen has long supported QuantumScape, investing over $300 million in the company. PowerCo, Volkswagen's battery manufacturing subsidiary, inked a non-exclusive agreement with QuantumScape. The partnership will generate royalty revenue for QuantumScape and offload some capital expenditures to PowerCo, which will help the company stretch its capital to fund the business into 2028.
Volkswagen Group is the world's second-largest automotive company by volume, and includes several other brands, like Porsche, Audi, Ducati, Bentley, and Lamborghini. It's a great partner (customer) and doesn't prevent QuantumScape from selling to other brands.
That said, it's becoming evident that investors will be waiting a long time for their reward, and it's unclear what the ultimate prize looks like. With the company planning its funding into 2028, this signals that there is likely no meaningful revenue coming anytime soon -- at least not nearly enough for the business to generate cash flow, let alone profits.
Plus, QuantumScape is only one of many pursuing solid-state technology. Many automotive companies have invested in next-generation batteries, directly or via partnerships similar to the QuantumScape-Volkswagen deal. Ultimately, QuantumScape has a wide range of eventual outcomes. How successful the company will be is still the great unknown until a finalized battery is ready for mass production.
A millionaire maker or a lottery ticket?
QuantumScape has a $3.3 billion market cap today. It may need to become a $30 billion to $100 billion stock to create life-changing returns for most individuals. Unfortunately, it's still too unclear what the company's eventual revenue and earnings will look like or how long it will take. In other words, nobody really knows. If it were such an obvious home run, Volkswagen, a company with $350 billion in annual sales, would probably buy QuantumScape outright.
So for most investors, this stock won't make sense to own. But if you do buy it, just keep your expectations grounded, and don't invest money you can't afford to lose if things don't work out.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Volkswagen. The Motley Fool recommends Volkswagen Ag. The Motley Fool has a disclosure policy.
