QuantumScape Put 1 Step Forward in a Long Mating Dance

Though it may not seem like it given the push to develop advanced batteries for the electric vehicle revolution, the search for a superior powerplant is a decades-long dance. Indeed, the main structure of the battery hasn’t changed much since its invention. But that’s exactly what QuantumScape (NYSE:QS) would like to change. QuantumScape claims that it has the key to eventual commercialization of solid-state batteries (SSB), potentially boosting QS stock.

It’s safe to say that any company that delivers a viable SSB at scale that can integrate itself across scores of EVs would be akin to finding the holy grail. Therefore, every organization under the business spectrum, from small, specialized startups to automotive giants like Toyota (NYSE:TM) have collectively invested billions into cracking the SSB code.

However, the road has been littered with failures – usually related to durability and cost concerns.

That’s why the latest announcement from QuantumScape meant a huge spike in QS stock during after-hours trading this week. The company met performance requirements which Volkswagen (OTCMKTS:VWAGY) specified, earning the battery maker a $100 million investment. According to Volkswagen, the automaker looks forward “to receiving and testing subsequent generations of cells, with the goal of getting solid-state technology into series production.”

Likely over the following days, we’ll witness a surge of interest as people chase QS stock. News like this implies that QuantumScape cracked the code that so many have been attempting to break. But is that justification enough to buy shares?

A Brief Rundown on SSBs

Before investors can understand the potential of QS stock – and more specifically, its risk-reward profile – they should learn more about the underlying product. That’s going to require due diligence on the part of prospective buyers. But below is a quick rundown on the important aspects as it relates to the investment thesis.

First, SSBs have been around for a while. Toyota is hard at work on its platform and we may get to see an example of it at the upcoming Olympics in Tokyo. Unfortunately, SSB research has run into multiple pitfalls. One of the biggest is the durability equation.

Within a typical lithium-ion battery, the electrolyte carries “positively charged lithium ions from the anode to the cathode and vice versa” through a separator during the discharging and charging process, respectively.

What has stymied EVs is that the electrolyte is in liquid form, requiring added real estate for the battery. This in turn makes the battery less dense – less energy potential in more space. In SSBs, the electrodes (i.e., anodes and cathodes) and the electrolyte are solid, hence the name.

However, QuantumScape goes a step further, essentially creating an anode-less SSB. This reduces the real estate requirements of the battery, which in turn means more energy density – higher energy potential in less space.

That’s one massive innovation. The other is the ceramic-based separator, which allows lithium ions to pass between anode and cathode while preventing dendrites from passing through and causing short-circuit risks. In fact, the threat of dendrites is what made previous SSBs impractical because they would fail after a few charge/discharge cycles.

With QuantumScape apparently having solved the problem, isn’t QS stock a no-brainer? Actually, far from it.

Don’t Chase QS Stock Without Reading the Fine Print

Though the developments and technical breakthroughs behind QuantumScape’s SSBs are impressive, you shouldn’t use the latest news as your sole justification for buying QS stock. It might not be too kind to say this, but the company is still in the “lab queen” phase.

Notice near the top that Volkswagen issued a statement regarding receiving and testing battery cells, not actual batteries. I don’t think this is just my interpretation because CNBC also reported that the German automaker will test lithium-metal cells.

Well, what’s the problem? Once you have the battery cells performing up to snuff, you just need to scale up and integrate them into a battery, right? But it’s not that easy. After all, scaling up to commercial practicality has always a major obstacle for not just SSBs, but other innovations.

I’ll use a baseball analogy considering that a new season is upon us. Going for broke in QS stock on the basis of battery cell performance is akin to drafting a player based on batting practice stats. As you know, real-game situations involve multiple variables that you just can’t practice for.

That’s not to say a good BP session isn’t encouraging. Certainly, QuantumScape has delivered a big win. But you must be very careful in assuming that a clinical step will automatically translate to commercial success.

Mainly, the scale itself is its own challenges and engineers don’t know what they don’t know. In other words, a battery cell may perform well under laboratory conditions. But how will they react in conjunction with other cells in the variable real-life conditions that EV drivers find themselves in?

Again, don’t misread this – QuantumScape made an important step. But it’s a step nonetheless, not a call for a victory formation.

Approaching QuantumScape Shares

Now, the one factor that I haven’t covered above is that none of what I discussed may matter. We live in a very emotional ecosystem where opinions and feelings apparently lever a greater impact than facts.

Here’s an example. I occasionally read criticisms of InvestorPlace and they usually center on a core misunderstanding: due diligence is the responsibility of the investor, not an individual writing an opinion about a company.

Further, I frequently see people criticize my colleagues (and me of course!) for offering opinions in our opinion pieces. Come on – that’s the whole point of our business. If you wanted just the facts, you could knock yourself out with the filings posted on the Securities and Exchange Commission’s website (titillating stuff).

The point is that retail investors at large appear to not be thinking rationally. That’s why I don’t recommend shorting QS stock. But in my opinion – to repeat, just my opinion – QuantumScape has more to prove than its flashy news presentations would suggest.

However, before you make any decision, make sure you perform your due diligence.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.