SLDPW - Solid Power Keeps Charging Ahead In The SSB Revolution

2023-10-10 13:23:15 ET

Summary

• Solid Power's stock price has declined despite a strong strategy execution, reinforcing a BUY rating.
• The new CEO, John Van Scoter, has plans to accelerate the company's growth and expand into the South Korean market.
• Solid Power's electrolyte has passed all 12 tests conducted with BMW, and production is proceeding as planned.

Solid Power ( SLDP ) is coming off another strong quarter in terms of strategy execution. However, despite this, the stock price has significantly declined since I last covered it. There have been significant developments, particularly in terms of leadership, with the new CEO, John Van Scoter, bringing some interesting ideas to accelerate the company's growth.

The drop in the stock price has not changed my opinion; in fact, it has reinforced my BUY rating. In my view, the fundamentals remain strong from both key perspectives: on the financial side, the pace at which liquidity is being utilized remains exactly as planned; on the technological side, Solid Power's powder has passed all 12 internally conducted tests in collaboration with BMW.

I recommend reading my previous analysis of the stock to get an overall picture of the company's activities and to understand why it has become my top pick for investing in solid-state batteries.

Summary of the Previous Analysis

Solid Power is a company specializing in solid-state batteries (SSBs). These batteries represent an evolution of the lithium-ion batteries currently used in EVs and battery storage. They are safer, as they are less flammable, offer higher energy density, longer lifespan, and faster recharge capabilities. Despite being a "revolution in the making" talked about for years, no one has yet managed to create a commercially scalable offering capable of dominating applications like EVs, eVTOLs, or battery storage.

Unlike other companies that aim to develop, manufacture, and sell solid-state batteries, Solid Power has a different business model. They focus on the essential component that makes these batteries possible, namely, the electrolyte. The electrolyte is what sits between the anode and cathode, the two poles of a battery. In the case of traditional lithium-ion batteries, the electrolyte is liquid or gel-like; in the case of solid-state batteries, it is, as the name suggests, a solid. More specifically, in the case of Solid Power, we are talking about a powder.

Solid Power intends to sell its electrolyte to OEMs and battery manufacturers. These companies can then choose to use the powder in combination with their own designs or even request licensing for the complete battery designs developed by Solid Power. This makes the business capital-light, highly agile, and rapidly scalable. Most importantly, in laboratory tests, Solid Power's powder has already shown excellent results, and the company is actively working on scaling up production.

Changes in Leadership: Who Is the New CEO?

The latest earnings call was led for the first time by John Van Scoter, the new CEO who replaced Dave Jansen. Jansen has been serving as Chairman since 2012 and as interim CEO since November 2022. As of October 8th, Jansen no longer holds any role within the company.

Van Scoter appears to be an excellent choice for Solid Power. His first significant role was as Senior VC at Texas Instruments, a position he held until 2008. From that point on, he went on to work for a series of significant companies in the fields of electronics, semiconductors, and innovation:

• CEO of eSolar until 2018.
• Executive Chairman at Princeton Identity from 2018 to 2023.
• General Manager and VP of SRI International from April 2019 to June 2023.
• For 11 years, from 2008 to 2019, he served on the board of TE Connectivity.

The new CEO wasted no time in presenting a concrete plan during the earnings call : to bring Solid Power's technology to South Korea. He believes that this is a critical market to establish a presence in at this moment, given the fierce competition among companies involved in R&D, battery OEMs, vehicle manufacturers, and electronics giants.

Why South Korea, You Ask?

Solid Power now occupies a significant portion of my portfolio, so I wanted to delve deep into the potential of the South Korean market. South Korea currently stands as one of the major hubs for research and development in solid-state battery technology.

SK On has recently developed a solid-state electrolyte that achieved a world record in ionic conductivity, and they have had a partnership with Solid Power since October 2021. Ionic conductivity measures how quickly ions travel within the battery, directly impacting battery output and charging speed. The achievement came through collaboration with Dankook University and was published in Advanced Functional Materials.

Samsung, on the other hand, commenced production of its solid-state batteries in June, with plans to start shipping to customers by the end of 2023.

LG Energy Solution has initiated an extensive partnership campaign with public entities and private companies. It could very well be the anonymous partner that, according to Solid Power's latest earnings call, provided "positive feedback" on SLDP's electrolyte.

Van Scoter has clearly identified this market as a significant variable for Solid Power, just three months into his new role. When a company primarily focused on R&D and essentially pre-revenue rapidly makes such an expansion decision, it likely indicates that something substantial has already transpired behind the scenes in my opinion.

Quoting from the latest earnings call:

Brian Dobson: "And that's right. I understand it's early, but do you think it would be a fair characterization to say you're making this move because you have received positive feedback from players on the Peninsula?

John Van Scoter: "I think that's a fair statement."

Production Proceeds as Planned

Last quarter was also crucial for another element - the commencement of full-scale electrolyte production. This production is overseen by a part of BMW North America's team, present directly at Solid Power's facility, as per the terms of the joint development agreement between the two companies.

Solid Power and BMW have outlined a list of 12 specific parameters that the electrolyte must meet. While there are no guarantees that the laboratory test results will replicate in mass production, Solid Power has announced that the currently produced material passes all tests. The third and fourth quarters of 2023 will thus be dedicated to ramping up production, aided by the arrival of new machinery, and, most importantly, sending samples and gathering feedback from potential customers.

The company assured shareholders during the latest earnings call that BMW's feedback has already been very positive. Collaboration with BMW's headquarters in Munich has even begun, indicating that the JDA with Solid Power is no longer a "peripheral bet."

The other important JDA, the one with Ford (F), has been renewed. All these positive developments bode well for the coming quarters.

A Glimpse into the Financials

At present, Solid Power's revenues are solely derived from joint development agreements and public contracts, so there isn't much to comment on in terms of growth.

Operating expenses and SGA expenses have increased as expected, as the company now prioritizes production volume expansion. Capex has decreased slightly compared to previous quarters and is nearly halved from a year ago. Below are the most important financial figures for Solid Power at this moment, bearing in mind that it is a company preparing for commercial sales on a large scale in 2024 (figures in $ millions, source: Seeking Alpha).

Crucially, it's important to note that the company remains debt-free, a factor I previously highlighted in my initial analysis as a pivotal one. Not only that, but Solid Power has reiterated its forecast to become self-sustaining in terms of cash flows before needing another round of financing. Quoting the latest 10-Q report :

"We believe that our cash on hand is sufficient to meet our operating cash needs (including expenditures for the increased pace and scope of development as well as increased public company costs) and working capital and capital expenditure requirements for a period of at least the next 12 months and longer-term until we generate adequate cash flows from licensing activities and/or electrolyte sales."

Update on Risks

Compared to my initial analysis, it doesn't seem that competitors have made significant strides. Currently, the primary risk is competition because being the pioneer holds immense value: whoever can first develop a winning technology at affordable prices for large-scale SSB production could potentially find themselves in the same position that Nvidia (NVDA) enjoys today in the world of generative AI chips.

Toyota (TM) has confirmed the arrival of its first SSB-equipped car in 2024, theoretically boasting a range of 900+ miles. There are skeptics, partly due to the limited details revealed so far, but it's reasonable to assume that such a giant may want to fly under the radar until it's ready to surprise everyone with its first commercially saleable model. In terms of PR, Toyota has always maintained an approach opposite to that of Tesla.

A significant leap appears to be made by Factorial Energy, a small Massachusetts-based company with a business model very similar to Solid Power's. In January 2022, it closed a $200 million financing round led by Mercedes and Stellantis (STLA), making it a player not to be underestimated. The company has sent out 100 samples of its first solid-state batteries to commercial partners. This news is only a few days old, so it will take some time before receiving feedback from customers. Factorial has also begun working on a 50,000+ square feet facility for battery production, but it lags behind Solid Power in terms of production.

Of course, there are also short-term factors that could move the stock price. We are in the midst of a Treasury price collapse that is shaking Wall Street, but this is a variable that cannot weigh as heavily as Solid Power's internal fundamentals. Even if the stock price could drop further in the coming weeks, to me, this would be an opportunity to buy at a discount.

Final Thoughts

Solid Power is continuing its journey exactly as expected, which is no small feat for such a young company working on an emerging technology. Compared to my previous analysis, I believe that the advancements made in production are shortening the time required before SLDP's technological potential transforms into economic results. While I initially indicated a horizon of 2-3 years, I am now convinced that within the next 12 months, we will truly discover the company's future. Customer feedback and production levels will tell us if we are indeed facing the most significant promise in the world of solid-state batteries, as I believe we are.

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