Is QuantumScape A Good Battery Growth Stock Pick For 2023? (NYSE:QS) (2024)

Elevator Pitch

I have a Hold investment rating assigned to QuantumScape Corporation's (NYSE:QS) shares. QS isn't as appealing as its peers on a number of metrics such as profitability timeline and valuations, but this is factored into QuantumScape's stock price to some degree with the recent pullback in its shares. Also, there are both positives and negatives associated with QuantumScape's long-term outlook.

QS Stock Key Metrics

QuantumScape refers to itself as a company "developing next-generation solid-state lithium-metal batteries" in its press releases.

The key metrics for QS worthy of paying attention to are the company's most recent Q4 2022 earnings release and post-results share price performance.

Operating losses for QuantumScape narrowed by -7% QoQ from -$121 million in the third quarter of 2022 to -$113 million for the last quarter of the prior year. QS' actual Q4 2022 operating losses came in +3% better than the Wall Street analysts' consensus estimate of -$116 million according to S&P Capital IQ data.

QS also recorded a narrower net loss per share of -$0.25 in Q4 2022, which represented an improvement from the company's Q3 2022 net loss of -$0.27 per share. Furthermore, QuantumScape's recent quarterly bottom line also beat the sell-side's consensus EPS projection of -$0.26.

But it is noteworthy that QuantumScape's above-expectations Q4 2022 financial performance wasn't well received by investors. QS' stock price fell by -17% from $11.84 as of February 15, 2023 to $9.81 as of February 16, 2023 after it reported Q4 2022 results. In the six trading days post-earnings announcement, QuantumScape's share price dropped by -18%, while the S&P 500 declined by just -4% over the same period.

Even with the recent pullback in its stock price, QS' stock is still up by +83% year-to-date in 2023. It seems that QuantumScape's share price had run ahead of fundamentals (as detailed in subsequent sections), and a correction was largely justified.

Is QuantumScape Profitable?

QuantumScape is still unprofitable, having suffered from operating losses of -$421 million and -$113 million for the most recent fiscal year and fiscal quarter, respectively.

It will take years for QS to turn profitable. QuantumScape is a pre-revenue company as it stands now, and the company emphasized at its Q4 2022 results briefing on February 15, 2023 that "more work remains to turn our technology into a commercial product."

Is QS A Good Battery Growth Stock For 2023?

QuantumScape isn't a good pick among battery names in 2023, judging by the sell-side's consensus expectations sourced from S&P Capital IQ.

In terms of the top line, QS isn't expected to register any revenue for the current year as per Wall Street's consensus numbers. In comparison, Enovix Corporation (ENVX) and Solid Power, Inc. (SLDP) have already recorded revenue in 2022 and they are expected to do likewise in 2023.

With respect to the time line for profitability, the analysts' consensus financial forecasts to ENVX achieving EBITDA profitability in 2026. In contrast, QuantumScape is projected to register positive EBITDA one year later in 2027.

As interest rates head higher making it more difficult to secure fresh capital at an attractive cost of capital, it is reasonable to expect that investors will pick battery companies which can achieve commercialization and operating profitability as early as possible. In that respect, QS isn't the best choice among the various battery stocks.

Is QuantumScape Worth Investing In Compared To Competitors?

QuantumScape isn't an attractive investment as compared to rivals and peers, considering its current valuations. I have discussed QS' revenue and profitability expectations in the preceding section.

The current enterprise value-to-consensus 2027 revenue multiple for QS is 4.1 times based on my calculations. Enovix Corporation's and Solid Power's current enterprise value-to-consensus 2027 revenue ratios are relatively lower at 1.1 times and 0.6 times, respectively.

In conclusion, I don't view QuantumScape as a worthy investment as compared to its competitors which have progressed further in terms of commercialization, and trade at more appealing valuations.

What Is The Long-Term Outlook?

The long-term outlook for QuantumScape is mixed.

On the positive side of things, certain automotive OEMs have indicated an interest in QS' battery technology, which makes it more likely that QS can eventually achieve commercialization as per its plans. QuantumScape revealed in its Q4 2022 shareholder letter that three new automotive companies entered into "sampling agreements" with QS last year, and one of the three is among the 10 largest auto OEMs worldwide based on sales. This is aligned with QuantumScape's claims in its 10-K filing that the company's technology provides "greater energy density, longer life, faster charging."

On the negative side of things, the Inflation Reduction Act or IRA could potentially level the playing field for companies competing in the battery space with the provision of credits for battery production. There will be more new companies entering the battery manufacturing space, as the breakeven point is lowered taking into account credits. At the same time, competition among existing players will also intensify, as the stronger players will reach profitability in a shorter period of time. An increase in competitive intensity is negative for QuantumScape.

Is QS Stock A Buy, Sell, or Hold?

I rate QS' stock as a Hold. There is uncertainty over the company's business outlook in the long run, and QuantumScape doesn't compare well to its peers on certain metrics. Based on QS' weak stock price performance after the earnings release, it appears that some of the negatives were priced in, therefore a Hold rating for QS is fair.