Solid-state battery researcher QuantumScape Corporation is facing a bloodbath on the open market after investment bank Morgan Stanley downgraded the company's share price target to $40 yesterday. The report followed the investment bank's extensive survey of the battery sector, and it saw Morgan Stanley analyst Adam Jonas reduce his valuation risk.
Jones's new price target for the Californian battery research firm is nearly a fifty percent reduction over its previous value of $70. The details of his report, sourced by The Fly and Seeking Alpha, briefly state the reason behind the significant shift in opinion.
They reveal that Morgan Stanley has surveyed the battery segment with a total addressable market value of $500 billion. The investment bank has created a Global Battery Portfolio through the survey, which consists of 71 companies and includes firms such as Tesla, Daimler, BMW, XPeng and QuantumScape.
The price target reduction and downgrade to Equal Weight for QuantumScape is another consequence of the survey. Analyst Jonas's latest views reflect his updated opinions about the company's ability to successful mass production. The price target cut aims to drop the risk present in a $70 price target, which is reflective of a higher expected value for the company's future sales. This value carries the risk of QuantumScape underperforming in the solid-state battery market and, therefore, missing the value projected in the old target.
A single separator (led) and a single-layer pouch cell (right) from a QuantumScape investor presentation. The company will have to manufacture thousands of these at a larger scale for mass production. Image: QuantumScape presentationAccording to Seeking Alpha:
The main drivers of the downgrade are the greater potential progress of competing battery technology and greater risk of commoditization across the battery sector.
Analyst Adam Jonas: "Our Battery Blue Paper points us to the threat of competition, technological risk and 'Balkanization' of the global battery market. While we continue to see QS as a technological leader in solid state, we modestly haircut our ramp to scale."
Morgan Stanley assigns a price target of $40 to QS, which works out 12.8X the 2027 EPS estimate and 2.5X estimated 2030 EV/sales and 12.5X 2030 estimated EV/EBITDA. Morgan Stanley says its base case assumes a 36% revenue CAGR (2028-2035) and a 42% EBITDA CAGR over the same time period.
The report has resulted In QuantumScape's shares rapidly losing their value, as the stock has dropped by more than 12% during trading today. This results in a $15 billion market capitalization for a company aiming to disrupt the battery market with a new technology that increases range and performance. Year to date, the shares have dropped by 28.9%.
According to The Fly, Morgan Stanley believes that electric vehicles are on track to meeting the ownership costs of conventional cars and that the battery market's future hinges on excellent price and performance from EVs.
The investment bank is quoted as outlining:
"The birth of the battery economy is reshaping century-old supply chains and creating a new industrial order," Morgan Stanley said in a report titled "The New Oil: Investment Implications of the Global Battery Economy." The firm believes that COVID-19 significantly accelerated the progress of the global battery economy, and estimates that the total addressable market for EV batteries by 2040 will be about $525B. Furthermore, Morgan Stanley identified two primary "force vectors" for change in the global battery industry, namely technology and policy/ESG. Together, these drivers contribute to an industrial "flywheel" that accelerates capital formation, lowers costs, and, ultimately, provides a path to commercial scale. Today's EVs are beginning to approach the acquisition cost and total cost of ownership of prevailing internal combustion engine technology, the firm noted, adding that over the next 5 to 10 years, the emerging battery economy is a story of BEVs becoming vastly superior in cost and capability to internal combustion engine cars.