written by reader Has anyone invested into the Kensington Capital /Quantum Scape SPAC acquisition

By they call me stupit, November 17, 2020

I’m newbie here , but I’ve been investing for years. I love seeing the beginning of Electric cars start to become the future in many respects. But I am truly interested more in what makes them go. Batteries and their company’s leadership. Specifically the KCAC/QS DEAL.
Any comments welcomed,
Thank Ye

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Travis Johnson, Stock Gumshoe
November 18, 2020 2:03 pm

Have not invested, but this is what I wrote in a Friday File last month:

The most interesting big “future” story I’ve looked at recently is the deal to take QuantumScape public — that’s a battery technology company that used to be a bit elusive and secret, with all we really knew about them being that they had a solid state lithium metal battery technology that was compelling enough to get some meaningful funding from Volkswagen… but now, with their deal to go public through a merger with the Kensington Capital Acquisition Corp (KCAC) SPAC, we’re learning a little bit more. You can see the deal presentation slide show here.

It’s a tough sell, however, other than the fact that the company has a brand-name connection to VW and some big-name investors, and is fairly well known in “next gen battery” circles… that’s because their revenue is so very far off in the future. Their presentations point to the startup of their initial pilot production line being four years away, and with a valuation based on 2027 revenues, SEVEN YEARS into the future. The comparisons they put out in their presentation, benchmarking their numbers and operational highlights to big battery makers like Tesla and CATL, make it seem like QuantumScape is a huge bargain, with much higher margins and revenue growth, and much lower price/sales and EBITDA valuations… but that’s absurd, of course, because you’re comparing the operating or next-year projections of established industrial companies to the seven-years-off future projections of a company that has not yet even started to plan the construction of its factory.

The money slide that claims “significant upside potential” estimates that they will actually build the company and reach commercial scale, and that the company will be valued at at least 5X revenue in 2028. Their spreadsheet tells them QuantumScape will have a little over $6 billion in revenue in 2028, so they’re estimating that the company will have an enterprise value of at least $32 billion at that point. They then discount that enterprise value by 20% a year, which is at least a high discount rate to accommodate the risk being taken in this imaginative soothsaying, and they say that means it should be worth $9 billion today. The enterprise value of the deal at $10 a share is $3.3 billion, so presumably at $14, where it traded recently, it’s about $4.6 billion… which means the stock right now is trading at a 50% discount to their forecast of discounted 2028 enterprise value. That is not a lot, considering that we’re years from really even starting the commercial side of the business. (This might be a bit unfair, but we should probably guess that the forecasting is about as optimistic as you’d hear from a junior miner who reports good drilling results and is plotting out how long it will take him to build a gold mine… maybe with a little dose of “we’re going to save the world, so it’s OK to fudge a little because our hearts are pure,” since every battery tech company these days seems inspired by Elon Musk in that regard).

Their prior statements indicate that they’re “fully funded to start of production,” with expected high margins, so that might lead us to expect they won’t need any additional capital to get to that 2028 revenue forecast… but that’s almost certainly not true — in the small print on that page it also says “Note: QuantumScape anticipates it will require additional debt, equity, or partner funding / prepayments through 2028” — which indicates to me that when they say “fully funded to start of production” they probably mean the start of their pilot production in 2024, not the actual ramp up of major commercial production over the following four years.

I’m a patient guy, but that’s a lot of uncertainty — or, perhaps, too much honesty. Still, they’ve got that Volkswagen connection to give them some EV credibility, and EV stories are super-hot, so it’s still trading at a nice premium — well off the crazy 100% gain it posted when the deal was announced, but still up 40% or so in the $14 neighborhood.

I have no idea what will happen with QuantumScape, and I’m not a battery engineer so I can’t claim to be certain that they will have a winning product, but it strikes me that they’re better-funded and have more potential than any of the other solid-state battery companies I’ve looked at. Given the extremely long lead time to prototyping, testing and then developing manufacturing capacity, however, I’d consider this a “bet small and put it away for five years” kind of position, it’s possible that it will create a firestorm of attention and go crazy if the EV trend remains strong, but it’s also possible that they’ll burn through a couple billion dollars and not end up getting their batteries built into electric vehicles at all, either because of problems in development or just because something better and cheaper comes along. The road to EVs is littered with failed battery companies, sadly. I like this one as a story, and I think solid state batteries have a lot of potential in the automotive market, but I’m not yet expressing that interest with money — I haven’t invested, but will keep an eye on it.

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