At first glance QuantumScape(NYSE: QS) appears to be a dgreat investment. Its solid-state battery technology is developing at a time electric vehicles (EVs) are on the cusp of taking over global roads. Further, its solid-state battery technology can store more energy, improve range, charge faster, is safer, and reduces cost as it eliminates part of the bill of materials from traditional lithium-ion batteries.
The problem is QuantumScape has had years to develop and get this technology into commercial production, and so far it still hasn't taken the final step. But is it about to finally turn the corner?
Cash burn
QuantumScape turning the corner comes down to two primary things: cash burn and commercial production. As QuantumScape has yet to generate meaningful revenue, it's imperative that the company keeps its cash burn at the sweet spot of developing its technology fast enough, but also reserving enough cash runway to last until commercial production -- unless it wants to raise more capital.
The good news is that the company ended the second quarter with $938 million in liquidity with a negative free cash flow of $308 million in 2023, which gives it a cash runway of roughly three years. Even better news is that its recent deal with PowerCo, the battery company of Volkswagen Group, and its capital-light licensing arrangement lengthens QuantumScape's cash runway by 18 months into 2028.
It's also this deal with Volkswagen's PowerCo that could be the final step toward commercial production, although it will take time to take that last step.
Brief recap
The critical PowerCo deal is a major step forward for QuantumScape's global scale-up strategy. The deal creates a dedicated team of experts from PowerCo and QuantumScape that will work together to commercialize production of QuantumScape's solid-state batteries for up to 500,000 vehicles initially with an opportunity to double that production in time. The deal also calls for QuantumScape to receive a $130 million prepayment of royalties upon satisfactory technical progress -- a big deal when you consider that covers almost half of the company's cash burn annually.
But before QuantumScape can take this final step with PowerCo, it must first turn the corner with Raptor and Cobra. Raptor and Cobra are simply code names for two stages of its production process. In 2024 Raptor has been focused on enabling low-volume sample production of its first commercial product, named QSE-5. Next year, Cobra will ramp up and will be the company's attempt at higher-volume QSE-5 production and becoming the core technology platform planned for PowerCo licensing. The company has already begun to order Cobra equipment for 2025.
What it all means
After years of watching QuantumScape make slow but steady progress, investors are likely ready for the company to finally turn a corner. QuantumScape has the cash runway and commercial strategy to turn into a phenomenal investment over time, but investors have to be patient.
QuantumScape appears closer than ever to turning the corner, and if Cobra is successfully ramped up, the company will be so much closer to taking that final commercializing production step with PowerCo, and on its way to rewarding longtime investors.
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Daniel Miller 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.
