TXN - Solid Power: The Only Pure Play Solid-State Battery Firm?

2023-09-20 09:00:00 ET

Summary

• Solid Power is a research and development-stage company focused on developing solid-state battery technologies for the electric vehicle market.
• Solid-state batteries offer advantages such as higher energy density, increased safety, longer lifespan, faster charging, and reduced environmental impact compared to traditional lithium-ion batteries.
• Despite facing challenges, Solid Power has strategic partnerships with major automotive manufacturers and significant backing from prominent investors, making it a promising player in the solid-state battery technology field.
• As such, we currently rate SLDP as a buy.

Introduction

In my search for a company involved in the development of solid-state battery technology, I came across Solid Power (SLDP). Solid Power is a research and development-stage company that is engaged in developing solid-state battery technologies primarily for the electric vehicle ((EV)) market. Solid Power replaces the flammable liquid electrolyte contained within a conventional lithium) ion battery with a proprietary sulfide solid electrolyte, according to the company .

SLDP is the only pure-play Solid-State Battery firm on the market. Focused on developing the next-generation all-solid-state battery technology, which makes the company unique. This revolutionary technology has the ability to revolutionize the mobile power market as we know it today.

While the company is currently in its early stages, the potential is huge. As such, we rate this company as a buy at its current price as it has the potential to become a multi-bagger in the future if they are able to execute their plans.

Why Solid-state Batteries?

Before we dive into the company analysis I would like to shortly address what the potential benefits of solid-state batteries are.

Solid-state batteries ((SSBs)) have several benefits when we compare them to traditional lithium-ion batteries. Some of the key advantages of Solid-state batteries include:

• Higher energy density: Compared to a traditional lithium-ion battery, Solid-state batteries can store much more energy in a smaller size.
• Increased safety: SSBs are safer due to the solid electrolyte that is used in them. This makes the battery non-flammable, making them safer.
• Longer lifespan: SSBs tend to have a longer lifespan compared to traditional batteries Faster charging: SSBs are able to charge up way faster.
• Smaller size and lighter weight: Not only are they faster than traditional batteries, but they are also smaller and lighter.
• Faster production while using fewer materials and energy: This makes a Solid-state battery much more environmentally friendly compared to lithium-ion batteries.

As you can see from the examples above, a traditional lithium-ion battery loses on pretty much every aspect when compared to a Solid-state battery. You might ask yourself: “Why aren’t we using SSBs?”

The answer is quite simple. Unfortunately, SSBs have several challenges associated with them as well, which currently prevents them from widespread use:

While solid-state batteries have many advantages, there are several challenges that prevent their widespread use:

• Production costs: The production costs of solid-state batteries are relatively higher as it is an emerging technology and its manufacturing is not happening in mass quantities.
• High internal resistance: Solid-state batteries have high internal resistance at solid electrodes/electrolyte interfaces which slows down the fast charging and discharging process.
• Contact problems between SSEs and electrodes: There are known issues with the contact between solid-state electrolytes (SSEs) and electrodes.
• Dendritic problems: Dendrites can form on the surface of the electrodes, which can lead to short circuits.
• Stability of chemical interfaces: The stability of the chemical interfaces between the electrolyte and electrodes is a concern.

These challenges are being addressed by researchers and progress is being made. However, until these issues are fully resolved, the use of solid-state batteries will remain limited.

We believe SLDP has the potential to revolutionize this market and as such we are now diving into the company itself, we will look at the company’s background, financials, competitors (although they are limited), and what we can expect from the stock.

One Of A Kind

From our view, SLDP is one of a kind. There is no other company that can be seen as a pure play for solid-state battery technology. In addition, the company has some very prominent investors. The company was initially funded by Hyundai (HYMTF) (HYMLF), Volta Energy Technologies, Umicore (UMICF), and Solvay (SVYSF), to name a few.

Furthermore, Solid Power has extensive partnerships with multiple large automotive companies. For example, BMW (BMWYY) and Ford (F) joined to develop all-solid-state batteries.

In addition, SK Innovation announced a partnership with SLDP to produce Solid Power’s automotive-scale all-solid-state battery cells.

The revolutionary potential of this technology has caused a lot of hype with investors ever since the company was listed on the Nasdaq in 2021. In May the company announced John Van Scoter would take over the reins as CEO in June of 2023. Van Scoter held multiple leadership positions over a nearly 30-year career with Texas Instruments (TXN), and was CEO, President and Chairman of solar power company eSolar.

Furthermore, he was VP at SRI International. Mr. Van Scoter’s announcement as the new CEO seems like a good decision to us. It looks like he is the scientist the company needs to continue growing the company and hopefully, he will be able to help SDLP fulfill its true potential.

When we take a look at the 2022 outlook the company gave in their end-of-year report in 2021. We can see that the company was focused on growing its revenues and increasing both the production capacity and the product quality and consistency.

As can be seen below, the company was able to add well over $5m in revenue as the company went from a total revenue of $2.7m in 2021 to a total revenue of $11.8m in 2022. In addition, the revenue is growing with the TTM revenue standing at $15.7m, at the moment of writing.

While the company still had $221.1m in total cash & ST Investments it has to be addressed that this is shrinking rapidly as the company continues investing in its prospects. The total cash & ST investments declined from $589.3m back in 2021 to $221.1m, as we mentioned earlier. This shows that the company is burning through this money at quite an alarming rate.

Furthermore, the company has a free cash flow of -$95.7M. This indicates that if they keep going at this rate without doing a capital raise the company could run out of money in a little over 2 years. In the chart below, you can see how the revenue and gross profit have evolved over the years.

With a 4Y revenue CAGR of 50.50% (based on 2019 till 2022 numbers) the company is showing explosive growth in revenue. Unfortunately, the company doesn’t have the FCF or gross profit to show for it just yet. Nevertheless, the company has an additional $222M in long-term investments, which further solidifies the balance sheet of the company.

However, this is not surprising for a high-growth company. One should see this as a high-risk/reward investment. If they are successful at developing a SSB before they run out of cash this company could become a 10X+ type of investment. As such, the risk/reward is quite enticing.

A statement from new CEO John Van Scoter underlines this potential. This is a statement made during the last conference call after the company reported its Q2 2023 earnings.

“Having been in the CEO seat now for 7 weeks, I’ve had some time to get to know the business and the people here at Solid Power. I’m happy to report that what I’ve found is a business that is transformative and forward-thinking, products that are being very well received, and a team with depth and talent worthy of the task at hand.

Specifically, I’ve found a business that has done the hard work of creating a multi-generational technology roadmap. In my experience, this level of forward-thinking is unique for a company at this stage. What’s more, we have also made progress with the second-generation electrolyte as well as the development of nickel-and-cobalt-free technologies.”

Especially, the “this level of forward-thinking is unique for a company at this stage” is something that really excited me. This shows that the company knows what they are doing and that they believe in the long-term project.

Furthermore, Van Scoter mentioned that his near-term priorities are to develop international capabilities, significantly growing their production of both cells and electrolytes. As such, they are investing in both tools and talent to elevate the supply chain competency across the board.

Another near-term priority is enhancing their investor communications. This would be helpful for future coverage of this stock as it is fairly difficult to find any decent presentation material to put in this article or to discuss the current roadmap.

2023 Operational Goals

Overall it looks like the company has made progress towards their 2023 goals. The company continues to execute on the joint development relationships with Ford, BMW, and SK across their government contracts, as evidenced by the recent extension with Ford .

In addition, the company started producing electrolyte powder at SP2 in April. They are slowly increasing their batch sizes over time. The CEO stated that the initial batches have been performing well. Furthermore, the powder has qualified on all 12 internal performance and quality metrics set up by the company. As such, the company plans on ramping up the powder production.

The company has made significant progress regarding the construction process of a dedicated powder development lab at SP2. This lab is intended to decrease the cost of production and to develop future generations of electrolytes.

Last quarter they communicated that it could take 1-2 years before they would have supply agreements in place with electrolyte customers and they have received very solid initial feedback from the samples they provided their customers. As such, Van Scoter believes they might be able to accelerate this timeline due to the great feedback they received.

Furthermore, the company mentioned they have made progress regarding cell development, but they have still a long way to go before these cells will be ready for commercialization.

Van Scoter mentions that the goals for 2023 have not changed even though cell development has had some challenges in the last 2 quarters. The goals for 2023 remain the following:

Scaling production of our electrolyte Continuing to deliver electrolytes to potential customers for sampling and feedback Delivering EV cells to our partners and Officially entering the automotive qualification process.

Financials

CFO Kevin Paprzycki believes the company is well-positioned for the long term with its strong liquidity and balance sheet. He mentions that the capex this year is mostly due to the heavy investment in SP2.

Paprzycki reiterates that he expects revenue to be between $15M and $20M, we believe this is fairly conservative and that it will probably be somewhere in the range of $18M to $23M based on the current TTM revenue of $15M.

In addition, he expects the ending liquidity to be somewhere in the range of $355 to $375 million. As such, he believes the company is well-funded till the end of the decade. They believe if commercialization is successful this would grant various funding possibilities or attractive financing terms, which they are aggressively pursuing.

As such, we would like to mention that the company currently has around 58% of its market cap in cash and short-term investments. In addition, the company has no debt and $222.3M in long-term investments. This could help the company form a significant bottom.

Financially, SLDP has shown impressive revenue growth, with a 4-year revenue Compound Annual Growth Rate ((CAGR)) of 50.50%. Although it's currently operating at a negative Free Cash Flow ((FCF)), its substantial cash reserves, long-term investments, and commitment to development bode well for its future. The recent appointment of John Van Scoter as CEO adds further confidence in the company's leadership.

SLDP is a high-risk, high-reward investment opportunity. While it faces challenges inherent to the development of solid-state batteries, its unique position in the market, strategic partnerships, and strong financial position make it a compelling choice for investors willing to ride the wave of innovation in battery technology. Nonetheless, the company has a high possibility of failure, but due to the strong balance sheet, they might be able to become a revolutionary company in time.

Technical Analysis

When analyzing the chart, we can see that a sustained downtrend is evident ever since its all-time high back in 2021. Since December of that year the stock dropped over 87%, hitting its lowest point in May of this year.

While the long-term trend looks pretty ugly, there are signs that the stock might be gradually finding a bottom. Notably, the stock is moving relatively sideways since the start of 2023, indicating that the stock might be in a stabilization phase. Of critical importance is the $2 support level, this level has been acting like a possible foundation for now and has been tough to break.

Furthermore, the most important resistance level is the declining red trendline. The stock has been in a downtrend for so long that a break above this trendline could give the stock very strong momentum. The $2.88 and $3.65 levels are the ones to watch in case this declining trendline breaks.

Moreover, if SLDP is able to break above the $3.65 level there appears to be minimal resistance until it reaches the $6 mark, with the $4.91 Fibonacci level serving as a potential hurdle along the way. This presents an intriguing opportunity for potential investors, should the stock make a decisive move beyond these levels.

Conclusion

In conclusion, Solid Power stands out as a unique and promising player in the field of solid-state battery technology. As the sole pure-play company dedicated to the development of solid-state battery technology, SLDP holds tremendous potential, particularly in the electric vehicle (EV) market.

Their innovative approach, which replaces the flammable liquid electrolyte in traditional lithium-ion batteries with a proprietary sulfide solid electrolyte, offers a range of advantages, including higher energy density, improved safety, longer lifespan, faster charging, and reduced environmental impact.

While SLDP is in its early stages and faces challenges typical of emerging technologies, the potential rewards are substantial. The company's strategic partnerships with major automotive manufacturers like BMW, Ford, and SK Innovation, as well as significant backing from prominent investors, including Hyundai, Volta Energy Technologies, Umicore, and Solvay, underline its credibility and potential for success.

Looking ahead to 2023, SLDP has set ambitious operational goals, including scaling the production of its electrolyte, delivering EV cells to partners, and entering the automotive qualification process. The company has mentioned that they are well on track to achieve their goals. Nonetheless, there aren't any exact figures given, we hope that in the future the company is able to give us some figures about these goals.

The company's leadership believes they are well-funded for the long term, with strong liquidity and a healthy balance sheet.

Technically, SLDP's stock has been in a pronounced downtrend since its all-time high in 2021. However, recent price action suggests the potential for a turnaround, with key support levels holding and a declining trendline to break. If the stock can break above resistance levels, it may gain significant momentum.

As such, we believe SLDP is currently a buy, due to the attractive risk/reward opportunity and the healthy balance sheet. Nevertheless, one should see this as a high-risk investment, but the payoff could be significant.

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