If you buy the Kensington Capital Stock story, be prepared to sell the new
One of the SPACs to hit the market was Kensington Capital (NYSE:KCAC) becoming the blank check company to be merged with QuantumScape. The story behind QuantumScape is the quest for a better battery for electric vehicles (EVs). And that makes Kensington Capital shares attractive.
In a year punctuated by disruption, reverse mergers have become uncharacteristically normal.
Whenever I write about a subject like electric vehicles and charging stations, I have to remember where I live. Suffice it to say, you don’t see many electric vehicles in our small town. But that is changing.
I’ve noticed quite a few Teslas over the past few months. And now we even have a Tesla charging station with space for four of the popular electric vehicles to charge at the same time.
So while the EV infrastructure may be more developed than I think, I can still believe that it may be years before QuantumScape has a ready-to-market product.
Why is Kensington Capital relevant?
Simply put, the impending EV revolution has a battery problem. Companies like You’re here (NASDAQ:TSLA) are working on improving the existing lithium-ion battery and also creating their own solid-state battery (although completely ignoring the QuantumScape design).
Other companies like Nio (NYSE:NIO) are tackling the battery issue in a whole different way with their Battery-as-a-Service initiative.
But the simple fact is that lithium-ion batteries are the Achilles’ heel of the electric vehicle revolution. And that heel will only be more exposed as demand for electric vehicles increases. First, consumers are already paying extra to buy an electric vehicle. One of the reasons for this is the battery.
Which raises the second problem. Once the battery has exceeded its useful life, consumers must either replace the battery (which can be expensive at today’s prices) or replace the vehicle.
There’s also the problem of our aging electrical grid that will only get heavier as millions of Americans try to charge their vehicles.
So a battery that requires less charging and has the potential to last a good decade would be a game changer.
Lithium-ion can have a tailwind
China has become a topic of major geopolitical debate. And one of the reasons is that the United States is now fully engaged in a race to become the world leader in electric vehicle technology. Being the first to market with a solid-state battery would go a long way toward that goal.
A knee-jerk reaction would be that a Biden administration will favor a company like Kensington Capital. Basically, I would say that’s true. But I don’t know if that speaks for KCAC’s stock over the next two years.
First, the technology is not ready. By the company’s own admission, it will be necessary to wait until 2025 before it is commercially available. This leaves plenty of room for competition to increase.
I use “increase” intentionally because QuantumScape already has competition from companies like Toyota (NYSE:MT), BMW (OTCMKTS:BMWYY), and hyundai (OTCMKTS:HYMTF) who form their own partnerships.
It also means that lithium-ion battery technology will continue to improve. If, as Joe Biden has said, the goal is to move away from fossil fuels, one way to do that will be to promote rapid acceptance of electric vehicles. And that means using technology that is currently available (i.e. lithium-ion batteries).
Not an investment you can set and forget
Kensington Capital is not betting on the future of electric vehicles. It’s a bet on a better future for electric vehicles. It’s also the furthest thing from a sure thing. Yes, technology can be a game changer, especially if QuantumScape manages to be first to market.
But the field is crowded and the technology will have to jump through many technical hurdles. At this point, Kensington Capital is a speculative buy. But with a good four years before the company is supposed to release a battery, it’s definitely not one you can put on autopilot.
As of the date of publication, Chris Markoch had (neither directly nor indirectly) any position in the securities mentioned in this article.
Chris Markoch is a freelance financial writer who has covered the market for over six years. He has been writing for Investor Place since 2019.