Chit Chat Stocks - QuantumScape (Ticker: QS): A Zero or the Next Tech Giant? With Simon Erickson

Episode Date: September 1, 2022

QuantumScape focuses on the development and commercialization of solid-state lithium-metal batteries for electric vehicles and other applications. The company was founded in 2010. Listen as Brett and Ryan ask Simon questions about the company, its business model, and its valuation. Enjoy the show! ***************************** This episode is sponsored by Stream by AlphaSense, the highest quality expert network library. Sign-up here and get a 14-day free trial:  https://streamrg.co/CCM ****************************** Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus ****************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Simon's work? Follow him on Twitter here: https://twitter.com/7Innovator?s=20&t=B7-1UYDm2d0SpmLFYgeH1g Sign-up to 7investing with code "MONEY" and get $100 off your annual subscription: https://7investing.com/subscribe/ Contact us: [e-mail] Timestamps QuantumScape | (4:56) Partnerships | (19:22) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Chit Chat Money. This is our Thursday deep dive interview where we have on an analyst to discuss a single stock and today we have on simon erickson and we're talking about quantum scape usually these go about 45 minutes to an hour so i hope this i think this is in about the same ballpark time um what were some of your highlights from the interview yeah i think the highlight here so this is a early stage battery technology company for electric vehicles and they're trying to really revolutionize the market and again this is pre-revenue so the valuation stuff you know we're not it's impossible it's basically impossible here we're all speculating and

simon goes through some great details on why theoretically and in their lab test this type of battery can maybe be the next big step change within the market so i love the discussion that i love the discussion of how they have these partnerships and the opportunity within that where this can be you know it's the most important part of an electric vehicle so if they have that differentiated technology it can be extremely extremely valuable but also weighing the downsides i mean it's pre-revenue company that may never be commercially viable so yeah fantastic all around if you're interested in these type of industry or this industry electric vehicles i know a ton of people are it's a great overview of understanding how one

of these businesses work yeah and i really liked uh when you know it's obviously as we mentioned impossible to value a company like this, but he talks about what the inputs are to trying to value it. And I think he goes through that in a really comprehensive and easy to understand way. But we don't need to go any longer about the interview since you're about to listen to it. If you do want to sign up for 7investing, because we mentioned this throughout the interview, but their new September Rex came out this morning. If you like Simon's work, you like this interview, really recommend going and signing up. You can use code money and get a hundred dollars off their annual at, I think it's seven investing.com backslash subscribe. I, uh, without further ado,

let's get to the interview. Welcome to chit chat money on this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. Today, we are joined by recurring guest and friend of the show, Simon Erickson. He is the B and A lead advisor at 7investing. And we're just going to shameless

plug it right now. Use code money to get $100 off the annual membership with 7investing. And the recommendations will have come out, the September recommendations will have come out the morning that this podcast comes out. I'm getting that right? Yeah. That is correct. You might not be listening to it exactly on this morning, but Simon, Any, can you give any teas, you know, to what the recommendations are this month, uh, for the listeners spicy kind of, you got without, without, uh, obviously we can't spoil anything, but yeah, any teas that you can give out. Well, thanks guys for having me on the podcast.

Thanks, Ryan. Thanks, Brad. And thanks for, you know, kind of the shameless promo that we have our top recommendations on the first of the month, every month, uh, being that this is the first that we're publishing this and we've got the new ones that are out there. This is actually the very first time in 7investing's two and a half year history that I think we've had a single month that had five of our seven recommendations that were either small cap or micro cap recommendations this month. So we're going to swing for the fences for a couple of them. It's going to be an interesting mix this month.

I'm looking forward to it. All right. Yeah. At least, you know, not just big tech, not just the ones everyone's talking about on CNBC, some stuff that might be undercover. That's very fun. Now, today we are talking about QuantumScape, which I guess I'll let you end up describing it. But can you talk about what they do, not only like big picture, but can you kind of try to break down the chemistry of it into layman's terms or in terms that I can under a non-engineer can understand? Yeah, absolutely.

And so kind of my strongest statement on this one is that QuantumScape is inefficiently priced today. It is wrongly priced by the stock market at a price of around $10 or $11 a share. It's either worth a lot more than that or a lot less than that. And it's our job as investors to figure out, OK, if the line is drawn in the sand right here, which one of those two is accurate? And it's going to take a little bit more digging than a lot of other companies because so much of what they're doing is very technical. And it's really different than almost any other company

that's publicly traded, in my opinion, of this market cap right now. QuantumScape is making batteries. And so electric vehicles, the most important part of electric vehicle in this entire market is the battery that's being used. And the industry as a whole for EVs, you kind of see all these companies, not just Tesla, but even the legacy auto OEMs saying, yes, we want electric vehicles. Yes, we want to make them price competitive with the others. Yes, we want longer range. Yes, we want higher performance. But it's really challenging to do all of that at the same time. I have a fun trivia question for you guys, which is when was the first lithium ion battery actually invented? Oh, okay. I know that. Well, I'm gonna let Ryan try because I

think I know the trick question here. I don't want to try. I want you to try. I think it was like the first electric car okay well i could totally be in this wrong because i know one of the first electric cars was like 1900 but i do not know if lithium-ion batteries were used there so it's either 1900 or like 1990 i'm gonna copy off my neighbor here and go 1900 there you go well that's probably true that they were thinking about them back there the first at least commercial uh lithium-ion battery was in 1974 uh so it's actually been 50 years right And it was in response to the Arab-Israeli war because the price of gasoline was going so high due to embargoes that, you know, energy companies started to say, hey, we need to have some kind of backup plan for vehicles. And so first lithium-ion comes out of the UK lab, you know, spends the next 50 years as kind of being the battery chemistry that was used for electric vehicles, but also a whole lot of other stuff, right?

You know, cell phones use lithium ions, power wall for storage on your on your, you know, Tesla power wall, all this stuff, you know, consumer electronics kind of went around lithium ion as the favorite. And it kept making improvements every year. But these were small incremental improvements. And Tesla and Elon were kind of it was kind of the first company that said, you know, hey, we're ready to start building gigafactories. and we think we're at a point that lithium ion is good enough right now that we can start manufacturing these at global scale right we we think that we are now ready to start making electric vehicles uh in the millions of vehicles every single year that people are going to buy but the challenge still remains with with lithium ion that there are technically some

um it's hard to progress from from where we stand today everyone is wanting a longer range right i want to make sure that I don't run out of juice if I'm driving my car to work and back. I don't want to run out of battery power for that. But also if I floor it, I want enough get up on the highway that this is going to perform like a roadster rather than a mild sedan or something like that. And then you've got trucking fleets that want to have batteries and electric vehicles and they want them to run for several hundreds of thousands of miles. And there's kind of this this saying that goes that uh there are liars damn liars and battery suppliers that batteries can always promise things like oh yeah we'll give you performance yeah we'll give you range yeah

we're going to give you longevity but with the limitations of lithium ion it's very hard to do all of those at once and this is my long-winded pitch of saying if you want to improve these specifications of batteries uh significantly you kind of have to change the entire chemistry you have to get away from lithium ion. And the only way that you can truly do that is to create a solid state lithium battery, which is built upon lithium metal instead of lithium ion. It's a fundamentally different science. It's got completely different rules. It is very, very expensive right now. But on the other hand, if we're going to get the types of volumes that all of the auto OEMs are wanting to promise in their electric vehicle product lines,

um we're kind of going to have to make a decision of are we going with what's good enough today or are we going to completely do something differently and if we're going to do something differently quantum state is is a type of company that that is taking a completely different approach that might serve the needs of what this electric vehicle market demands in the coming years so now uh let's get some context around just what that means if this is commercially viable I know a lot of it's theoretical. I know they might not reach the promises they have talked about, but I read that they could promise a thousand mile range. I mean, why is the solid state battery just so much better if they can achieve what... I know

it hasn't been built yet at the commercial scale, but if they can get there, why is it so much better? There's some material properties of lithium metal that are superior to lithium ion. uh one of the most uh the biggest one the one that people focus on a lot is energy density right now a lithium metal can hold a lot of charge you can pump this full of electrons when you're when you're charging it and then when it discharges you can have that flow of electrons actually very very very good right the discharge time is very quick and then you can also recharge it very quickly too right so when you're talking in terms of for what a consumer wants uh you want to have something that can pack a lot of charge and you can maybe get 400, 500 miles out of a single charge

out of it. But then you also want to be able to recharge it in 15 minutes rather than six hours. And typically lithium ion, you haven't been able to do both of those, right? And then on top of that too, you want to make sure this is something that's going to last for several hundreds of thousands of miles. Certainly Elon has come a long way with Tesla, but one of the limitations, at least that we've seen from kind of consumer reviews right now is when the battery goes kaput one limitation is safety right lithium ion there's bear with me guys i hope i'm not putting anybody to sleep on this but just to kind of go into the chemistry is when the battery um is storing charge in the anode and then it's sending it to the cathode but to make sure that it just

doesn't happen all on all at once it travels through a material called an electrolyte and the middle of electrolyte there's a separator too over time the traditional lithium ion batteries this electrolyte material will build up these nasty root looking needle looking uh formations within the electrolyte they're called dendrites and this degrades the battery over time so best case scenario your battery degrades you have to replace it every couple of years right and if you guys are buying a tesla model 3 or a model s or whatever you're buying you probably don't want to to say, okay, this is going great, but now I get hit with a $15,000 charge because I have to replace the battery pack. That stinks, right? You're going to be like, oh gosh, who's paying

for that basically. And then the extreme, the other really, really bad thing is say that you had these dendrites building up, they're shorting out the battery itself. And all of a sudden you have an explosion underneath the hood of your car. Your electric vehicle blows up, hopefully not with few in it, but it shorts out in their safety concerns. And a lot of the critics of Elon and Tesla are saying, hey, we're not there yet with lithium ion battery technology that is addressing some of the biggest problems that we have. And so lithium metal, in addition to the specifications of having a 400 mile range, of having a potentially 15 minute charge time to get from zero to 85% charge. And just kind of the longevity of a battery being able to go several hundreds of

thousands of miles. A lot of these promises are out there and they look good in the lab and they look good in R&D prototypes. Now the question is, can you really scale those up? Can you really fulfill the promises that you're making of how this is better than Tesla or Panasonic or anybody else who's making lithium ion batteries today in a way that's safe and then actually has got superior specifications for the automakers. If you can, then every single automaker in the world wants to use this battery pack if you can get it cost competitive with what's out there today. So that's the interesting part about QuantumScape. That is the challenge that they're facing as a business today. Okay. So that's really helpful, especially for someone who doesn't understand

the technology. And there's something that they, if you read through any of their letters, they mentioned different layer cells as kind of different milestones. And so the most recent one, I think, was the 24 layer cell. Can you maybe explain what the layer cells mean? And then why was 24 such a big milestone for them? Yep. So layer is between the anode and the cathode, right? Like, you know, there's materials between where the charge is being stored and where is being discharged to, right? So more layers basically means we're going to break up this problem

of dendrite formation into a way that you've got more and more proprietary materials separating the anode from the cathode. At first, it was one, then it was two, then it was four. And I think they went up,

you know, all the way up and now they're at 24 layers. And again, you know, Ryan, this is still in lab scale, but they're showing successively, yes, you can discharge the cells. Yes, you can charge them back up in a short amount of time.

And yes, it's running through more and more cycles. You know, it's actually it's actually working. The longevity of the cell is there. And again, the proprietary materials that they use that they don't disclose are working and you're not getting those dendrite buildups. QuantumScape is very, very tight-lipped about the materials they're using. They're solid state cells. So the electrolyte is a solid material.

They are lithium metal, which means they don't have a carbon composite in the anode anymore. It's going directly to the lithium metal, which is storing the charge. All of these are great for energy density. All of these are great for all the other quality specifications that we just mentioned. But again, at the end of the day, if you've got proprietary materials with superior performance, you've got to show the world that you're progressively improving those to commercial scale. And that's where we stand with QuantumScape. So every time that you see, you know, 24-layer cell, improving, you know, production capabilities in the lab, capital expenditures to get more and more kind of scaling materials that we've got out there.

All of this is kind of inherent for a company that's still not making any sales at all. There's zero revenue for QuantumScape at all right now. All this is is production partnerships as they continue to try to tackle these incredibly difficult challenges. Yeah, we'll get to the revenue or lack thereof and kind of how an investor might want to look at that. But one more thought on, I guess, just the batteries themselves. How far away are they from, like, if they have 24 layers now, I mean, do they need to get to 100, 400, 500 to become commercially viable? And then, and aside of that, who are they competing with? Are there any other companies that are at their stage or are they kind of in a league of their own, a league of their own? Excuse me.

There's two components to that. The first is how do they look in the lab versus what's commercially available? And then two is how are we going to actually scale these up with the partnerships they have in place? Tackling the first part of that today, I took a look at Tesla's lithium ion batteries. These are the ones that are going to the Model 3, right? And then I looked at QuantumScape's lithium metal batteries that they have that are in R&D prototyping phase right now. And I looked at kind of three factors, right?

Energy density, both volumetric and gravimetric, so by volume or by weight, driving range, and then also the charge time, you know, for a full recharge of the batteries. QuantumScape's prototype materials are superior to Tesla's lithium ions on all three of these metrics, right? in terms of watts per hour per liter or kilogram that's the energy density in terms of the driving range you know tesla's at around 360 380 today versus 400 in the lab already for quantum scape and then the charge time a full charge for for a tesla you would want to leave it overnight plugged in even with the rapid charge stations that they have versus a 15 minute promise charge for for quantum scape right now so all the specs look good for lithium metal versus lithium ion that they're technically superior specifications. The second part of your question was,

why does a 24-layer cell matter? 24 layers is the minimum requirement for the first of three phases in the OEM partnerships that QuantumScape already has in place with several of the largest OEMs in the world. So the companies that are making vehicles today that are already making electric vehicles are qualifying lithium metal as opposed to lithium ion for their future models. And they're saying to QuantumScape, okay, yeah, put your money where your mouth is, show me the specs, but then also I want to see this increasing based on A, B, C, and D. A 24-layer cell is reaching basically sample A of A, B, and C that is promised in the future. So we've kind of hit a milestone here of what is something that is the expectation

for their end customers. We've gotten the first checkmark that we needed, right? There's still a lot of work that's going to go into this over the next five years of qualification as you kind of go farther and farther. But it's a good first step. They are doing what they said that they were going to do, acknowledging this is going to take a lot of time. There's going to be a lot more milestones they're going to have to hit along the way.

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help them at all i guess it's probably the most interesting part of the investing thesis is that they've signed partnerships with the big guys in the industry right this isn't just quantum scape going out there and saying hey this is awesome we built the better battery you know everybody flocked to us because we're going to have something ready by 2026 uh they're being very methodical about step-by-step. Who are you working with and what are each one of those steps going to look like? The one that they've disclosed, Ryan, is Volkswagen. Volkswagen has got seats on the board of QuantumScape. They're very involved with the research process. They put $200 million into an equity stake in QuantumScape. They're kind of the one that was out there publicly saying,

we really want solid state lithium metal batteries for our electric vehicles. The others are a little bit more secretive about what they're doing. And in fact, they haven't disclosed the names of the companies that they're working with because there's a lot of kind of back and forth or proprietary information. But they have disclosed that they have, outside of Volkswagen, six other OEM partnerships. In fact, earlier this year, they said that, you know, I believe four of those were with top 10 auto OEMs. And without them saying the names, you know, we look at that, that could be the Toyotas

of the world. That could be the Fords, the Hondas, the GMs, the BMWs of the world. I mean, by volumes, these are really high volume companies out there that are saying, yeah, we're really interested in with this. Maybe we don't want to develop all the technology ourselves. Maybe we'll hire out QuantumScape to build these batteries for us. And then we're going to ramp up the volumes over time. And the interesting piece of this is going to be to see how that progresses.

In addition to kind of the technical challenges that are going to be methodically worked out one step at a time, QuantumScape's executives are going to be compensated very well over the next decade with stock, which is tied directly to the achievement of those milestones for their customers. The stock-based compensation, it isn't just, hey, great job, QuantumScape CEO, here's an option for you to make a billion dollars this year. It's tied directly to the performance that they provide for their customers. And I think that's a really smart way to do this.

It's not just a pipe dream. It's something that is one step at a time. show us that you're making progress over something that has promise in the lab. And I think that's the right way to do it because this isn't just going to happen overnight. It's going to be something that's going to be planned out over the next period of five years. QuantumScape as a company doesn't expect any production volumes, commercial volumes until the year 2026. So we've got four more years of R&D work to get something that will be eventually embedded to global production of vehicles that are sold all over the world.

And is, so you mentioned that Volkswagen has some seats on the board and there's obviously a great financial interest from a lot of these potential customers for QuantumScape to succeed. Do they give QuantumScape any sort of like financial backing or are they trying to help QuantumScape get there in any way? Like how do, how does having that partnership benefit QuantumScape? Yeah. Funding R&D, a lot of it is funding, you know, the pilot scale stuff. So if you are working in a partnership with QuantumScape, they'll probably have like a production facility as close to your production facility as possible.

There's some capital expenditures that goes into that, right? You got to pull the equipment, you know, to get this stuff up and running. There's some operating expenses. You have to have a team, stuff like that. Those are kind of different based on each one of the partnerships. The only ones that we've seen is Volkswagen, which has an equity stake and then is also committed to funding a lot of the R&D scale up. All right. That makes a lot of sense.

I know it's tough to quantify this because the industry is in an early stage. The company is in an early stage. We don't know whether the product is going to be commercially viable yet or when, but maybe give some numbers on how big this opportunity is because we all know that maybe next 10 to 15 years, the majority of cars on the road are going to be electric vehicles. That seems like a ginormous opportunity. so so how large is that for for someone like quantum state escape yeah i can write a lot of these out bread and maybe we'll post them either on your site or on seven investing just to kind

of see the numbers but i'll walk through them anyway just to kind of see the forecasts but there are third parties that kind of estimate you know how big is the ev market going to be both within the united states and globally one of the forecasts that i liked was was saying that you know in dollar terms the ev market globally was worth 185 billion dollars in 2021 and it was to grow to be about a trillion dollars by 2028 uh one of the other consulting agencies that i liked was from deloitte deloitte said that you know within the world globally there were about two and a half million electric vehicle cars sold in 2020. by 2030 they think that that's going to increase to 31 million ev cars 10x increase over the decade and then ev adoption is an industry um

kind of a marketer that looks more at the US market. And they predicted that there were about 500,000 electric vehicles sold in the US alone in 2021. Most of those, by the way, being the Model 3 Teslas. But they think that's going to grow to about 4.7 million by 2030. So regardless of who you look at, we're probably talking at least a 10x increase in EV volumes and dollar sales over the next decade. I pulled some other numbers too. And I looked at, you know, today, what is the average cost of a lithium ion battery, most important component of the electric vehicle itself. And in 2021, the average cost, not, not final price, but average cost of lithium ion batteries was about a hundred dollars per kilowatt hour. Right. And then I took this a step further

and said, okay, let's look at the model three. You know, how big is Tesla's battery that's in there. Depending on the size, you can upgrade it based on how much you want to pay for it. But it's typically between 60 and 80 kilowatt hours is the battery that's going into the Tesla vehicle today, Model 3. And so breaking that down, $100 per kilowatt hour times 80 kilowatt hour battery, you're looking at $8,000 by cost for the battery cost itself for the vehicle maker. And by the way, if you have to replace that as a consumer, there's markup. If your battery goes the replacement cost for you as a consumer is actually close to about $15,000, about double what the cost is for the automaker. But we'll just say in terms of you're selling to the automaker

itself, say it's $8,000 today. So that's where we're at today. Let's just conservatively assume, Brett, that QuantumScape's batteries are better than what's out there today, right? Instead of being an $8,000 cost, let's say that they're just charging $10,000 per battery. I think personally, it's going to be a lot higher than that, but let's just assume $10,000 cost to the auto OEMs. And let's assume also that out of that 4.7 million United States only expectation for EVs, let's assume that QuantumScape can provide 1 million batteries globally per year. That would be 20% to 25% of just the American market. But let's just conservatively assume they can sell a million batteries a year in all markets. So $10,000 per battery times 1 million

batteries per year is a revenue run rate of $10 billion a year for QuantumScape by about 2030, right into the decade, let's say. And let's also be really conservative and say that if Tesla is getting a price to sales multiple of 14x today, because it's selling the end vehicle to consumers, let's say that a battery supplier might get half of that, might get a price-to-sales multiple of seven. If I slap on a seven price-to-sales multiple onto $10 billion a year of revenue, I'm suddenly looking at a valuation of $70 billion market cap by the end of 2030. The market cap for QuantumScape today is about $5 billion, which would mean this is a 14-bagger by the next eight years. And I think that even that is conservative assumptions because I think

the pricing and the volumes will actually be much higher than that. But again, the reason I say it's inefficiently priced is if you want to get that 14 bagger, you've got to show that you can scale up to a million batteries a year, right? If this falls apart in the lab and they don't get there, maybe QuantumScape is worth zero. Maybe it gets lapped by other companies that are doing the development themselves. Maybe lithium ion just shows that incrementally it's going to improve at a rate that's acceptable enough to not need lithium metal. But I think that the point of what makes this interesting is that if they do succeed and they do sell out, they're at capacity because every one of these partnerships that they have, the six partnerships plus Volkswagen turns

out, or even a fraction of them works out. I think that you're looking at a stock that could be conservatively a 10 bagger, maybe a 20 or a 50 bagger, depending on how things play out with they're commercial partners. It certainly keeps it interesting for me as a stock market investor that I'm intrigued enough to look at how things are going there. Yeah. I know people probably hear the huge increase in revenue and think, well, that's obviously a bold assumption, but it's assuming that if they are successful reaching those milestones, that would be the theoretical market or theoretical opportunity, which is what we were trying to get at is there any way to know um i know it's like hard to say

without any revenue yet but is there any way to know what kind of profit margins they could generate on these because i'm just like picturing it from the auto side they wouldn't want like they can't pay too much for the batteries if they can't give an economically viable car to the end consumer. So like, is there, how much pricing power would QuantumScape have really? And then like what, what would translate to profits for them? Yeah, that's right. So Ryan, everything that we just looked at the numbers there, those were all kind of compiled from third party estimates and then my own analysis, right? This was not anything that QuantumScape told us specifically, but interestingly, they actually kind of jive with the guidance that management

has given. So now let's look at what QuantumScape thinks they're going to do, right? They're estimating that by 2026, they're going to start ramping up commercial productions. And by 2027, they're going to have $3 billion of revenue and $1 billion of gross margin. So that'd be a 33% profit margin off of $3 billion in sales. By 2028, they're expecting $6.5 billion of revenue at about a $2 billion gross profit. And then we can kind of extrapolate that out. We looked at numbers to 2030, which as that kind of grows, we said $10 billion a year was reasonable.

That seems to match the ramp that their own company thinks that they're going to get. And it seems like in terms of gross profit, you can get about a 20% to 30% steady state margin from the business. And management also believes that a little bit less than that, maybe call it a 20%, 22% EBITDA margin. earnings before interest taxes depreciation and amortization that would be kind of if we hit commercial volumes this is maybe a 20 to 25 margin business which is very good when you consider the volumes that are out there right that makes sense and I guess on the flip side let's look a bit maybe

more on the risk here they're not going to be you know selling anything until potentially 2026 to 30 range is when they're going to start actually generating revenue. What is their current burn rate? I know they raised a ton of money through a SPAC and how long can they really go without needing to raise a bunch more money? I mean, that's kind of something you're probably looking at as an investor, right? Absolutely. Cash burn is incredibly important right now when you're not making any revenue. The business has about $1.2 billion in cash and short-term securities, right cash on the balance sheet and uh right now in terms of the cash it's burning not counting stock based comp and things that are not cash charges they're going through about 250 million

dollars a year of operating expenses and then another call it 200 to 20 million a year in capital expenditures right scaling things up so you're burning through half a billion dollars a year in operational and capital expenditures and you've got about 1.2 billion in the bank so probably we've got a comfortable two two and a half years of a run rate right now but it does seem to suggest that if you're not going to have commercial volumes till 2026 or 2027 we're probably looking at 2024 2025 a secondary offering or at least a dead offering something that's going to juice some more capital into the system is there any incentive for the government to give them funding i know obviously uh we just had that bill but those i mean those are so complicated

yeah like just uh you know carbon a better something that's offering a better solution for uh the environment seems like it's on their agenda would that i don't know would that lower quantum scapes cost of capital by any chance or is it more like nah i mean let's see who let's see let's see who makes it and then then we'll fund them absolutely it would you know this isn't something the company spends a whole lot of time talking about at least in their shareholder letters uh they they tend to focus more on the commercial progress and more of the um you know how is this being funded by actual end users and customers of theirs now if you can get some money from the government and you can subsidize the cost of that that's awesome that's kind of like

icing on the cake um but i don't really have a whole lot of insight as to what that might look like or dollar figures of you know how that might impact margins and capex and all that stuff right right what do you think of management very important here i'm guessing um what are their qualifications i'm assuming technical background uh i would hope so uh but i don't know what are your general thoughts on them super technical dudes you know these are these are guys that are going after the gold um they want to improve this system they see that the bottleneck of electric vehicles right now is the battery right this is the thing that's holding back the progress that they want to accomplish.

Jamie Straubel was chief technology officer of Tesla, co-founder of Tesla, right there from the beginning with Elon, kind of developing lithium ion. He said, I think solid state is a better way to do this. And he spent basically the last 10 years in the lab saying, how can we make a proprietary material, a proprietary solid electrolyte that would have the correct separator and the correct materials that could crack this code? you know how can i charge up this lithium metal in a way that's not going to form dendrites right at the at the at the interface at the surface it's not going to degrade over time but i could

still maintain the energy density and the discharge times and the charge times and all the other stuff we want to do like it's kind of like if you're a material scientist like jb is you love this stuff right you want to start it in this in the lab and then you've got to have people with deep pockets and people who are good at executing to bring it from cool r&d prototype project to something you actually sell out there. And so John Doerr, one of the greatest venture capitalists of all time, Conor Perkins, he was really involved. I think he's out now in terms of ownership stake. He's more of just a guidance. But he was an early backer that had a seat on the board and was kind of saying, okay, let's build out the comp plan that's going to be aligned with

progress. Here's how much money you're going to need. And here's the partnerships you're going to have to have with industry partners. He was kind of a guiding light for a lot of QuantumScape's early days. Keep in mind, this is a company that's already 10 years old. They've been at this for a very long time. And then Jagdeep Singh is CEO of the company, also co-founder of the company. He's run a publicly traded company before. He was the co-founder and CEO of Infinera. For anybody who follows that, they were kind of a company that years ago built the backbone of the internet so that when video streaming and everything else that demanded fast bandwidth or a very high bandwidth and fast internet speeds, they were

kind of the ones that made the photonic integrated circuits that went into the mass long haul backbone of the internet. So if you wanted to connect Europe to the United States and, you know, kind of all of this infrastructure that goes into things we take for granted today, he was the guy that kind of said, no, we're not going to make incremental improvements. We're going to build an entirely better optics based internet backbone. it's cool he's the right guy to tackle really big projects but infinera as kind of an example never caught on with at&t and verizon right they were always signing these kind of tier two telecom

companies uh because they wanted to maintain their premium pricing and they never really caught on with the existing partnerships that these largest companies already had and i think that's i don't know if it's a red flag, but it's certainly a yellow flag to me. I'm like, can they do this with QuantumScape? Can these six industry partnerships plus Volkswagen, are they going to bear fruit? And are they going to get the biggest players? Or is Toyota going to go ahead and go and try to develop their own solid state battery themselves? Because they can do it more economically than what QuantumScape is wanting to demand for a 25% EBITDA margin. It's kind of a question that's unanswered right now, but it's something we should keep in the back of our mind.

You've got a fantastic executive, you know, who is who is very motivated to progress all of these partnerships because that's how he's going to get paid in stock over the next decade. But on the other hand, you've kind of got a lot of competition between the auto OEMs who could just very well do this themselves. So they put enough resources at it. You've got the improvements in lithium ion batteries themselves, right? Panasonic and Sony are showing five, six percent improvements in the energy density they're getting every single year. And then you've got Elon, who a lot of people are kind of considering, you know, the godfather of electric vehicles right now and the foremost interest, foremost expert globally in lithium ions, saying it's impossible to scale up what they're trying to do.

He says, yeah, it looks great in the lab, but you're never going to scale this up to commercial volumes. It's going to be, quote unquote, insanely difficult in Elon's own words. And in fact, keep in mind that QuantumScape itself, the name of the company is built upon quantum dot technology, where you've got these nanoscale materials that were semi-conductive and were kind of the direction they originally wanted to head in. And then they even realized and admitted, hey, we're never going to scale this up. We're never going to get quantum dot technology to commercial scale.

And so they moved to lithium metal. but the name QuantumScape itself is legacy referring to a technology that's just not scalable. So it's a long-winded answer. It's a very complex answer. They're solving a very, very difficult problem. If they crack it, they're going to sell out every single battery they ever make and they're going to get great margins on it. If they don't, what's the role of solid state versus the existing status quo in the industry today? Again, it's mispriced. It's either going to be incredibly successful or it's not. Do you kind of think of it as biotech almost they're not biotech, a pharmaceutical company where there's going to be this binary event,

semi-binary event. And if Quantum State gets there, they're going to have this advantage where for one of the most important markets in the world, revenue-wise or dollar spent-wise on batteries for electric vehicles, they're going to have this competitive advantage because of this proprietary technology if they can get there, but they also might fail. yeah kind of like that right brett it's like instead of having one binary event where the fda says yes or no to your phase two clinical trial you're running you know where it says nope not safe or you know is it working or you know we're not going to put that we're not going to commercialize that that kills the program that's a binary event it's dead but like for quantum

scape they've got maybe six fda's which are their partner seven when you count volkswagen seven fda's they're all saying okay we're seeing progress but you need to get to here before we're going to give you more money you know and so you're going to see various degrees of success you want to see the biggest ones you want to see volkswagen they're their most public partner you want to see that one succeed for sure you want to see the sample a batteries that they've got it's 24 layer now you want to see those taking off um i assume that they're working with bmw's got other specifications and qualifications that they've got out there but again it's kind of these phase gates, right? You make progress, you spend a couple of months, you tell the world about the

progress you make, you go back and you say, okay, now we've gone from A to B, now I got to get from B to C. And each one of those has got a team that's really working for progress out there. And at the end of the day, if you sum up all the parts, you know, what is partnership A worth if it commercializes? Discount that back to the present. What is partnership B, C, D, E, and F and G worth? Discount all those back to the present. You've got a summation of the parts of what is a true intrinsic value of a company like QuantumScape. That's the same way that we value biotechnology companies today? Have you got different programs or different drugs that are all going through trials and they all have different probabilities of success? But I mean, fundamentally,

it's kind of the same thing, right? It's a sum of parts of what is this going to be worth when you actually finally cross the finish line. I think you already pretty much answered our last question. We usually ask, how could this investment go wrong? But I think you've already alluded to it. Is there anything else that you would, I guess, maybe how are you monitoring this to the point where you would say, okay, this investment is not going right. Maybe it's time to get rid of it. One thing we like to do at Seven Investing, and we actually use for a lot of our recommendations is we never recommend anybody back the truck up for any one stock all at once. right? I would highly recommend about seeing QuantumScape and being like, oh, man, this is

going to change the world. I'm putting 100% of my stock portfolio into this company. I think a better approach for a company like this, where you can actually follow along with the story over time, is to say, okay, maybe a full position for me might look like 6% of my invested capital. And I'm going to start with just a 1% stake today. And then if I like where it's going and I see that they're making progress, I put another 1%, another 1%, and until a full position reaches 6% of whatever money you might want to put in. Seven Investing, we do this through re-recommendations. We'll make a recommendation once and if we really, really like the company, we'll go back and we'll re-recommend it over time.

QuantumScape is one of those companies. You can see if things are going well or not well and make an assessment of whether or not you want to put more money in. But I think the biggest risk would be just be like, OK, this is something that you assume is going to go perfectly well right out of the gate. You put a ton of capital in a front and then it doesn't work out the way that you kind of were hoping in the best case scenario. So be measured, be methodical. The company is certainly being methodical. This is not an overnight success story. This is something that will take five or six years to even have something that's getting in into the vehicles that are being commercially produced over there. There's no rush.

It's a marathon, not a sprint. All right. I think that's all the questions we have. Do you have any more? You're good? All right. Well, this is maybe a good chance for the reminder. It's code money for $100 off the annual.

Thank you, Simon, for coming on the show. Again, we want to remind our listeners. Pause. Where can people find? We'll have it in the length of the show notes, but where can people find 7investing if they don't know what it is? Yeah, 7investing.com is our website. And if you go to 7investing.com slash subscribe, and then use that promo code money, like you guys just mentioned, you get $100 off the $400 annual subscription.

So 300 bucks a year. I might be biased. I think that's one of the better deals on the internet. And then you can see immediately direct access to every single recommendation we've ever made, including the seven that we'll now post here tomorrow morning. Perfect. This morning. This morning. We're publishing on Thursday.

Yeah, that's exactly. Yeah. We have to do a little time travel when you record the podcast. That's right. All right. Well, that is going to do it. We want to remind our listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation.

We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you again, Simon, for joining the show. We'll see you all next time.