Did QuantumScape Just Say “Checkmate” to Tesla?

Renewable and sustainable energy are emerging as a popular investment choice for energy investors. Electric vehicles (EV) are part of this trend.

Tesla is arguably the leader in EV adoption. However, QuantumScape (QS 4.88%) has also received considerable attention since going public in 2020.

The primary differentiator between Tesla and QuantumScape lies in battery technology.

Tesla’s vehicles use lithium-ion batteries. Over the last several years, the company has invested significantly into a new model of lithium-ion batteries, called 4680 cells. By contrast, QuantumScape is developing a solid-state battery.

While Tesla has long averted solid-state batteries, there is some evidence that the technology is more energy efficient than current lithium-ion models. The main argument surrounding solid-state batteries versus traditional lithium-ion technology is that it’s capable of shorter charging times, lower costs for drivers, and longer ranges.

This all sounds great on the surface, and begs the question why Tesla isn’t investing in solid-state batteries as well.

Let’s examine QuantumScape’s current projects and assess whether the battery maker could leapfrog Tesla in the EV market.

QuantumScape is making progress, but…

QuantumScape has made some major strides so far in 2024.

According to the company’s first-quarter shareholder letter, QuantumScape has achieved its first major milestone this year: shipping its latest battery cell, dubbed Alpha-2, to prospective customers.

Considering how intense the EV market is, this forward progress from QuantumScape may bode confidence for investors. However, there is always more to the story. Let’s take a look at QuantumScape’s business and explore why Tesla is pursuing alternative solutions.

Image source: Getty Images.

…there is a reason Tesla isn’t following suit

The chart below illustrates some important operating metrics for QuantumScape. As of March 31, the company held $192 million of cash on the balance sheet. Moreover, with roughly $817 million of marketable securities, QuantumScape has a total liquidity of about $1 billion.

QS Cash and Equivalents (Quarterly) data by YCharts

According to management, QuantumScape has runway until the back half of 2026 given the current rate at which it is spending its cash reserves.

While this is encouraging, keep in mind that QuantumScape is going to continue investing heavily in research and development and capital expenditures over the next several years. Considering the company is not yet generating revenue, there isn’t much room for error in expenses and capital allocation.

Tesla is the superior investment

Considering the number of bumps in the road affecting Tesla’s growth, some investors may be wondering if QuantumScape carries better upside given its momentum. Moreover, with shares down 30% so far in 2024, it’s natural to think Tesla’s best days are in the rearview mirror.

Personally, I don’t see it that way. Despite its slowing growth, Tesla has a number of catalysts that I think will pay off in the long run. By contrast, QuantumScape is still in the exploration phase of a new technology that’s possibly superior to existing power sources in EVs, but doesn’t have any tangible business results to show for it.

Outside of batteries, Tesla is pursuing autonomous driving technology. Although Alphabet‘s Waymo has proven a formidable competitor, I think Tesla has an edge given the company has collected over 1.3 billion miles of driver data. This volume of data is allowing Tesla to train its self-driving car software at an efficient pace relative to its peers.

This is especially lucrative because Tesla could benefit by licensing its autonomous driving software to other automakers in the long-run. Moreover, Musk appears to be taking this ambition extremely seriously as he recently met with Chinese regulators in hopes of striking a deal to integrate its autonomous driving technology into cars in the region.

Furthermore, Tesla is also making a splash outside of EVs through its develops in artificial intelligence (AI) robotics products as well.

Solid-state batteries for EVs are a relatively new concept. As the chart above indicates, the costs associated with producing and manufacturing this technology come with a steep price tag.

While the progress in Alpha-2 is impressive, investors should note that these batteries are still only prototypes. This implies yet another subtle risk with QuantumScape, and why Tesla isn’t pursuing solid-state batteries.

Namely, even after massive investment, QuantumScape is yet to produce its batteries at scale. This is another challenge the company will face in the future if solid-state batteries become more widely adopted.

It’s entirely plausible that QuantumScape’s solid-state batteries become an industry standard in the EV market. However, I see this as unlikely.

Even at mass production, solid-state batteries will command a premium for some time. This will only add significant costs to automakers like Tesla, which will then be forced to pass on these expenses to consumers in the form of more expensive vehicle prices.

I think this is exactly why Musk remains content using lithium-ion batteries. Tesla has identified several other areas to complement its EV business, and would rather allocate financial resources into those opportunities.

While QuantumScape could absolutely expand outside the EV market, Tesla has first-mover advantage across many different opportunities.

For now, I see QuantumScape as a speculative investment at best. For investors looking for growth in an established business with long-term prospects, I think Tesla is a more prudent choice than QuantumScape.