QS: Right Tails
If you’ve never heard the phrase, a "right tail" encompasses the extreme positive outcomes of a probability distribution. These are typically very low probability events, but can be highly impactful for valuations.
It’s definitely a bit premature to think about extrapolating QS’s potential, but it’s fun to postulate and adds intrigue while we patiently await Raptor cell deliveries.
Advanced Cathode Chemistries
Quantumscape’s ‘secret sauce’ is their separator, which is meant to act as a platform that’s chemistry agnostic. They’ve already demonstrated compatibility with LFP and NMC cathode chemistries, and have inferred compatibility with NCA cathodes (although I’m not sure if they’ve ever demonstrated this).
But more importantly, I think they have their eyes set on the next wave of cell chemistries: Conversion Cell Technology.
If you’ve never heard of conversion cells, “conversion reaction materials react during lithiation to form entirely new products, often with dramatically changed structure and chemistry, by reaction mechanisms that are still not completely understood.”1
Basically, what this means is that the cathode material undergoes a chemical reaction during charge and discharge that changes it’s composition into something else.
One of the cathode materials that shows the most promise is FeF3, or iron(III) flouride.
FeF3 has been shown to have a specific capacity of 579 mAh/g compared to roughly 200 mAh/g for NMC811, nearly triple that of current cathode technology. Note that this is for the cathode active material, alone; cell level energy density won’t triple.
I particularly find it promising that Quantumscape has kept the following graph in their investor deck:
In fact, Quantumscape already has patents that involve conversion reaction cells. One patent involves a hybrid cell configuration that includes a combination of conversion materials and intercalation materials (such as NMC). FeF3 was one of chemistries explored for this patent.
Advancing lithium ion battery technology could increase Quantumscape’s potential moat and further solidify their place in the industry. It’s also a nice lead in to the next topic.
Market Expansion
Quantumscape has their current sights set on electric vehicles, and that will keep them busy for quite some time. Beyond EVs are the obvious consumer electronic markets they’ve often mentioned during interviews and conference calls along with stationary storage, but there’s also a litany of other industries that could benefit from improved cells.
Aviation has the most potential for future capacity demand as it requires both high energy and high power. EVTOLs are an obvious target for SSBs (eventually). Joby currently uses cells with 288 wh/kg energy density. The potential bump into the mid 300s would make a massive difference in range for them. And that’s before considering that conversion cells could nearly double the energy available in Joby’s current powerplant.
Going beyond EVTOLs, there are some applications for commercial air travel. Figure 2 is reproduced from a study on electrifying commercial aircraft.
This shows that conversion cells (discussed previously) may be enough for lower level regional jets to convert to carbon-free flight. Whether or not conversion cells will be able to handle the power requirements is another story, one that I haven’t looked into myself.
As it so happens, CATL just released news that they’ve successfully tested a 4-ton electric aircraft, with a goal of developing an 8 ton commercial electric aircraft by 2028 (Electrek article). For reference, a Boeing 737 is 45 tons and a Gulfstream G400 is about 35 tons. So 8 tons will be relatively small in the grand scheme, but I’m sure can capture a decent market.
In addition to aviation, higher classes of commercial trucks can begin to decarbonize with better battery technology. It’s unlikely that class 8 trucks will be beneficiaries in the short term because of range and weight limitations, but busses and commercial delivery vehicles seem ripe for the picking as their stop-and-go nature make them ideal for capturing regenerative breaking energy. We’re already seeing some of these vehicles making the transition.
Ceramics Applications
At the end of the day, Quantumscape is a materials science company, now with a specialty in manufacturing thin film ceramics. There may end up being tons of applications in the future for ceramic technology.
Corning (ticker: GWL) started out making light bulbs in the late 1800s. By the 1970s they invented fiber optics, paving the way for the telecom boom in the 1980s. Today, they are an industry leader in smartphone and television screens, with many other product offerings as well. They even have their own ribbon ceramics development in the works.
Plenty of companies expand their product offerings over time. It’s possible that QS is able to spin off subsidiaries in the future that leverage their expertise in ceramics, batteries, or materials science in general. Not only does this offer right-tail characteristics, but it also lends itself to downside protection for the company. In the event that Cobra doesn’t meet expectations, the IP developed to date should carry some residual value.
Summary
Again, it’s way to early to really even worry about this stuff. All eyes should be on Raptor and Cobra progress for the next year and a half. But if QS does get to commercialization, these things will need to be considered when valuing the company as valuations can appear stretched when they’re really not. Amazon was ‘overvalued’ for decades before finally growing into the valuation thanks to AWS. The same can be said for Tesla as no one believed they could scale, economically, into commuter cars. These companies were overvalued by most standard metrics, when really investors were too unimaginative to value their potential.
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Understanding Conversion-Type Electrodes for Lithium Rechargeable Batteries
Seung-Ho Yu, Xinran Feng, Na Zhang, Jeesoo Seok, and Héctor D. Abruña
Accounts of Chemical Research 2018 51 (2), 273-281
DOI: 10.1021/acs.accounts.7b00487