Electric vehicles (EVs) are at a critical juncture in the industry. The biggest hurdle to EV adoption is battery range, and traditional lithium-ion batteries may be reaching their limits.

QuantumScape (NYSE: QS) is sprinting to tackle this challenge by pioneering solid-state batteries, a novel technology that purportedly offers superior range, durability, and safety.

This breakthrough could potentially transform the company’s stock into a life-changing investment, capable of turning individual investors into millionaires in the years ahead. While recent testing data is promising, the company and its shareholders have a long expedition ahead.

What are the odds of success? Here is what you need to know about the potential upside and risks of holding QuantumScape stock.

The Promise of QuantumScape’s Solid-State Batteries

The significance of battery technology in electric vehicles is unmistakable. The battery is arguably the most pivotal component of an EV, and QuantumScape is spearheading the development of solid-state battery technology. So, what does this mean?

In a lithium-ion battery, lithium ions oscillate between a cathode (positive side) and an anode (negative side), depending on whether the battery is discharging (powering something) or charging. The current battery construction consists of a metal oxide cathode, a graphite anode (in an electrolyte solution), and a polymer separator between the two.

QuantumScape deploys a solid-state anode, eliminating the need for an electrolyte solution to receive charged lithium ions. When charged, lithium metal traverses the separator to the anode side and remains solid. This design boasts greater energy density, enabling it to store more energy than other batteries of similar size. This translates to extended ranges for EVs, quicker charging, and a simpler production process.

QuantumScape has been collaborating with Volkswagen, with whom it struck a strategic partnership in 2021.

PowerCo, a battery company under Volkswagen, has been testing a prototype and recently announced the completion of 1,000 successful charging cycles. The company stated that the battery retained 95% capacity at the end of testing.

PowerCo highlighted that for an EV with a range between 310 to 370 miles, this would represent a lifetime range of over 300,000 miles with almost no loss of charging capacity.

Earlier this year, Tesla had claimed that its Models S and X would typically lose 12% of capacity after traveling 200,000 miles. The potential of a solid-state battery drastically enhances current technology and has the capacity to expedite EV adoption, particularly in regions lacking accessible charging networks.

What Lies Ahead for the Company?

QuantumScape currently inhabits the space between test stages and gearing up for production. Simultaneous investments in research and development are underway, along with the installation of machinery for manufacturing the final product.

This has resulted in consistent cash burn in the business, totaling $354 million over the past year. Fortunately, the balance sheet boasts $1.1 billion in cash, which management claims will sustain operations into 2026.

Translating QuantumScape’s existing position into future investment returns can be intricate due to the multitude of ongoing developments and the potential for setbacks as the company readies for the commercialization of its batteries.

Here are some concerns investors should keep an eye on:

Intense Competition

EV batteries present a colossal opportunity, consequently attracting a plethora of competition. Companies like Toyota and Nissan are independently developing their own solid-state technology. Both believe they can launch solid-state battery EVs around 2028. Will Volkswagen’s collaboration with QuantumScape discourage other brands from procuring their batteries?

QuantumScape could potentially benefit from a first-mover advantage and wield enough influence to compel other automotive brands to fall in line. However, it is a potentially tumultuous landscape that will only settle over time.

Financial Challenges

As many manufacturers have found, scaling up production to high volumes is an expensive endeavor. Factories come with exorbitant costs, so QuantumScape’s cash deficits could exacerbate before the company begins generating profits. If so, management might need to secure additional funding sooner than anticipated.

Dilution of Shareholders

QuantumScape is leaning on investors to raise capital for its operations. While this is customary, taking on debt might not be prudent for a company without revenue.

However, dilution is inevitable, and more shares in circulation mean that the intrinsic value of each share diminishes. In essence, each share represents a smaller stake in QuantumScape, which ultimately erodes investment returns.

The number of outstanding shares has surged by over 40% since the company went public a few years ago.

Investors should monitor the future issuance of shares. Dilution arises not only from issuing shares to raise capital but also from stock-based compensation, with nearly $162 million distributed to employees over the past year.

Is QuantumScape Likely to Mint Millionaires?

Simply put, a remarkable product does not guarantee an exceptional investment. With a market cap already exceeding $3 billion, QuantumScape’s stock has seemingly begun pricing in success that is yet to materialize.

Even if the company manages to commence production over the next several years, investors remain uninformed about the potential profit margins, management’s guidance through this growth phase, or the competition landscape in the years ahead.

There are more questions than answers, despite the technology’s considerable potential. Investors can certainly consider investing in the stock, but they should approach QuantumScape as a speculative investment and only retain shares as part of a diversified portfolio.

If QuantumScape hits a home run, you might not need a massive stockholding to potentially make significant gains.