SLDP - The Future Is Solid: A Deep Dive Into Solid Power's Battery Technology

2023-07-28 10:33:08 ET

Summary

• Solid-state batteries are a rapidly developing technology with the potential for a significant impact on the automotive market and beyond.
• Solid Power stocks are particularly appealing due to the company's attractive valuation and savvy business model.
• The potential return on investment for Solid Power is very high compared to the risk, making it an interesting asymmetric bet.

In recent weeks, I've been focusing on gaining exposure to the solid-state batteries (SSBs) market. It is a technology rapidly transitioning from theoretical utility to practical revolution. Obviously, it would be immensely beneficial to have more data and more years of adoption to assess the impact of solid-state batteries on both the automotive market and beyond. However, as always, investors are rewarded for forecasting the future and dealing with uncertainties: we necessarily have to grapple with the severe immaturity of the SSBs market.

Despite the overall uncertainty, I believe - and I will explain why in the following paragraphs - that there are compelling reasons to gain exposure to the solid-state batteries market. In choosing between investing in QuantumScape ( QS ), Solid Power ( SLDP ), and/or other companies working on this technology, I consider Solid Power stocks particularly appealing for two reasons: the company's attractive valuation and its particularly savvy business model.

The Potential for an Asymmetric Bet

The big question is this: Will solid-state batteries become the winning technology for electric car manufacturers, or will they remain one of the possible discarded designs in the history of technological progress?

At this time, it's impossible to answer with certainty. What we can do is estimate the probability of either eventuality and the consequences that both scenarios would have for investors.

If the technology were completely abandoned and Solid Power sank along with the ship, shareholder value would be wiped out. This is the most pessimistic scenario, and we must accept that it is a tangible possibility. Not only would it entail the loss of the entire investment, but also the loss of the opportunity cost associated with deploying that capital in other investments.

The Risks of Investing in Solid State

Considering that QuantumScape's first solid-state battery prototypes have already been delivered to OEMs, and Solid Power will do the same in 2023, the next five years will likely be the decisive ones for understanding the future of this technology. An additional 2-3 years will then be required to discern whether Solid Power will play a significant role in this market, whether it will be acquired, or whether it will become a global leader. All of this is still uncertain.

Thus, assuming a time horizon of eight years, the worst risk is finding oneself losing 100% of the invested capital and the opportunity cost. Assuming that another asset would have returned 8% annually over these eight years, the overall risk amounts to 185% of the invested capital.

The Potential Return

Among the most accredited market research, the most optimistic forecasts speak of a CAGR of 19% for EV batteries in the coming years, while the less optimistic ones speak of a CAGR of 10% . A median estimate is that of Acumen Research, which predicts a CAGR of 16.9% . Using this median estimate and considering that the market size was $41.4 billion at the end of 2022, this means that by 2031 the size of the TAM would be $144.3 billion.

Considering 2031 as the reference year for the analysis is also useful due to the current market situation: by 2030 all new vehicles sold in the European Union must be low-emission, and by 2035 they must be electric. Many states in the U.S. are moving in the same direction and even more automakers have independently decided to switch completely to selling electric cars by 2030 or 2035.

Let's assume, then, that by 2031, Solid Power is able to capture a modest 4% of the market. This would imply company revenues of $5.77 billion.

Assuming a net income/revenue ratio of 14%, similar to Tesla today, and that the stock is valued with a P/E ratio of 25 due to the still high growth rate of the sector in 2031, this would imply a valuation of $20 billion for Solid Power.

The company's current market cap is $450 million and it is likely that shareholder stakes will need to be diluted over time to meet capital requirements. Let's assume a pessimistic scenario where the company will issue $900 million in new shares over the next 8 years: the effect would be equivalent to considering a market cap of $1.35 billion today in our analysis model.

The potential return on the investment, taking into account the issuance of new shares and the estimated valuation for the favorable case in 2031, would thus be 14.8x the invested capital.

The risk, considering also the opportunity cost, is 1.85x the invested capital. Curiously, the result of the division is exactly 8. This means that, with the (limited) data currently available, my forecast is this: if there's at least a 12.5% chance that solid-state batteries become the dominant design and that Solid Power manages to capture 4% of this market, it's worth gaining exposure to the company's shares.

In the following paragraphs, I'll focus both on why I believe solid-state batteries have a high likelihood of mass adoption, and why I believe Solid Power's model has excellent chances of success compared to competitors.

Solid-State Batteries: Hype or Technological Revolution?

Solid-state batteries potentially offer significant advantages over traditional lithium-ion batteries:

• Greater energy density, offering more energy for the same weight;
• Increased safety, as it removes a flammable element from the battery;
• Less need for cooling, reducing costs for battery packs and overall volume;
• High charging speed and high lifespan measured in charge cycles. These two characteristics are comparable to those of the best lithium batteries in circulation today.

All this gives a strong motivation to develop solid-state batteries that can be produced on a large scale and at contained costs. Investments are already coming from both the public and private sectors. Additionally, there are opportunities beyond EVs, in other application areas where SSBs could replace lithium-ion batteries.

Public Investments

An important advantage for American solid-state battery manufacturers is that the U.S. Department of Energy is investing more in emerging technologies than elsewhere. The United States certainly does not want to concede technological supremacy to China in terms of batteries.

On January 12, 2023, Solid Power announced that it has been awarded DOE fu nds totaling what is expected to be $5.6 million. This is one of 12 DOE projects, collectively funded with $42 million, to explore advanced technologies to power EVs.

Competition Among Manufacturers

All major automakers are active in researching SSBs. Most of the time, these are joint development agreements between manufacturers and specialized companies. At the current stage:

• Toyota is the company that seems to be furthest ahead, to the point that it plans to use SSBs as early as 2025 to launch models capable of traveling 745 miles on a 10-minute charge;
• Solid Power has signed two important development agreements, one with Ford and the other with BMW ;
• Mercedes has signed with ProLogium Technology , a Taiwanese company investing €5.2 billion to open a large SSB production plant in France;
• Stellantis is working with Factorial Energy and aims to present the first cars with a solid-state battery in 2026;
• According to market rumors, Porsche is working with QuantumScape to launch an electric version of the iconic 911;
• Volkswagen has been working with QuantumScape for a long time.

Opportunities in New Markets

EVs remain the main market for solid-state battery technology, but their safety, low cooling needs, and high energy density could make them valid for other applications: battery storage is one of the main suspects, as well as eVTOLs.

Solid Power vs QuantumScape vs Other Competitors

Solid Power has a particular business model, which does not require taking care of the entire battery production. Technologically, it is perfectly capable of competing with the best companies specialized in solid-state batteries and shows an attractive valuation.

Moreover, there is a strong catalyst coming up, namely the fact that the new electrolyte production plant has just come into operation. At full capacity, it will be able to produce 2,500 kg of electrolytes per month (30 tons per year) and will allow the company to reach the volumes necessary to enter the market for supplies to EV manufacturers.

Technology

The technology used by Solid Power is very interesting because it integrates with that already used today by OEMs producing lithium-ion batteries. Essentially, it allows for relatively simple production conversion, keeping many components unchanged and purchasing the only material needed to switch to SSB production - sulfide-based solid electrolytes - directly from Solid Power.

This solution is different from that of QuantumScape and all the main competitors, which instead focus on the entire battery production cycle.

Speaking of technological capacity, the energy density of the batteries that Solid Power aims to put on the market is represented in the following table and compared to Tesla's current batteries:

Business Model

The business model is based on the sale of licensing for proprietary technology to produce solid-state batteries to OEMs. These are also sold the essential element to produce these batteries, i.e., the electrolytes that Solid Power produces at its Denver facility.

The first offices of the facility were populated last October, while actual production began in April of this year. Already in the course of 2023, the OEMs should receive the first samples, and the next two years will be essential to validate the business model.

In contrast, QuantumScape and ProLogium are battery manufacturers. They take care of the entire production cycle. This means a less flexible model, with higher capex needs, with more possible bottlenecks and critical points.

Valuation

The valuation is what really attracts me to Solid Power. The company is valued at $450 million, and at the end of Q1 2023, it had $254 million in cash and equivalents, against a forecast cash burn of $120-140 million for 2023. The debts were practically zero and long-term investments amounted to $212 million. This means that, paradoxically, today the book value per share is $3.04.

If I have to bet on an asymmetric wager, I much prefer this valuation to that of over $4 billion - against assets of $1.3 billion - of QuantumScape. It leaves considerably more margin for a revaluation of the share, for the same technological risk.

Final Thoughts and Considerations

What will become of Solid Power in the future is really hard to say. Solid-state batteries increasingly seem more a question of when rather than if. That said, it remains a "when" quite far in the future. What can be said is that the entire EV sector is based on promising technologies that were once where SSBs are now.

In the face of high risks, investors can also be rewarded with an extremely high return given the company's attractive valuation and the catalyst offered by the start of solid-state electrolyte production at the recently inaugurated plant.

I consider it a long-term oriented investment, for those who have a small part of the portfolio that can be forgotten for 5-8 years. Among the many asymmetric bets of today, solid-state batteries are more concrete than many others - such as LiDAR for autonomous driving or green hydrogen vehicles. Despite this, the valuations remain attractive: putting everything together, I believe that Solid Power deserves a buy rating.

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