The Case for Solid Power
Solid Power (NASDAQ:SLDP) has emerged as a $309 million market cap enterprise with a TTM $20 million revenue focus. The company’s core objective is to supply solid state battery technologies for the EV industry and deliver a sulfide-based solid electrolyte for use in solid state batteries. Solid Power predominantly generates revenue by meeting milestone targets in collaborative R&D development endeavors with its key OEM partners. Despite being currently unprofitable and yet to significantly ramp up commercialization efforts, the company’s auspicious progress and potential to capture a vast market opportunity make it an appealing stock.
I am bullish on Solid Power for five key reasons:
- Solid Power is making promising progress toward automotive qualification
- The company is well-positioned to scale electrolyte production and commercialization
- It exhibits strong operational execution
- The management team and board of directors possess extensive domain-specific experience
- The valuations are attractive
Understanding Solid State Electrolytes
Solid state batteries utilize a solid material (electrolyte) to facilitate electron movement instead of a liquid material. This represents a pivotal technological advancement in the EV industry as it promises safer vehicles, increased charging capacity, enhanced durability, and greater lifespan.
The Business Model
Solid Power’s business model revolves around licensing solid state battery designs, manufacturing processes, and selling lithium-sulfide-based electrolytes to battery manufacturers. The company stands as a leading entity in the sulfide-based electrolytes market. While sulfide-based electrolytes are less common compared to oxide-based ones, they offer superior performance. However, the technology necessitates a large-scale manufacturing process, and the supply of lithium sulfide poses a significant bottleneck. Notably, Solid Power does not engage in commercial battery manufacturing, a fiercely competitive arena with high capital barriers and narrow margins. By focusing on technology licensing and being a provider of solid state electrolytes, the company collaborates with multiple battery manufacturers and EV OEMs, capitalizing on the potentially lucrative $60 billion electrolyte market.
Battery manufacturing is really hard. It’s very competitive. It takes very large investments. There’s a lot of large incumbents. The margins are tough, and, again, very capital intensive. And so we stand to have a much larger addressable market because of that. We’ll not be competing directly with our customers in many cases. And we’ll avoid the $1 billion gigafactory cost and just be able to invest in the electrolyte manufacturing portion of the technology.
– CEO John Scoter in the November 2023 Company Conference Presentation
Given this strategy, Solid Power steers clear of direct competition with its customers and the exorbitant costs associated with commercial battery manufacturing.
Progress Toward Automotive Qualification
The company’s progression towards automotive qualification is pivotal for integrating solid state battery technology into EVs. Achieving this milestone involves various stages, with Solid Power already producing Pre-A sample 20Ah and EV cells at the outset of 2023. The FY23 10-K underscored a major goal for the year – to produce EV cells for formal entry into A-sample testing.
A major 2023 goal is to produce EV cells to formally enter A-sample testing.
– Solid Power FY23 10-K
The Q3 FY23 10-Q report revealed that the company successfully made its first A-1 EV cell deliveries to BMW in October 2023, marking the formal commencement of the automotive qualification process. These deliveries supported BMW’s demo car program, with additional deliveries anticipated in the coming months. Solid Power’s accomplishment is particularly noteworthy given the years of dedicated R&D efforts. Notably, this places the company ahead of competitor QuantumScape, as QuantumScape has only progressed to the A-0 stage according to its latest commentary in January 2024 (also mentioned in QuantumScape’s Q3 FY23 earnings call). Moving forward, Solid Power anticipates proving more A-sample designs as it collaborates closely with its OEM partners.
Solid Power Making Waves in the Automotive OEM Industry
Electric vehicles (EVs) have escalated into the automotive limelight, demanding advanced technology for power sources. Institutions have to keep up with a rampant horse of innovations, and Solid Power is galloping ahead. The firm has been focusing on the development and production of solid-state batteries through impressive partnerships and manufacturing advancements. As automotive giants gear up to transition to solid-state batteries, Solid Power appears to be in prime position for a successful ride into the future.
Positive Signs of Partnership Prowess
Defying norms, Solid Power’s non-exclusive partnerships are shaping up to be a strategic boon. Collaborations with BMW and SK Innovation, framing a foothold in Europe and a base for Asian operations, showcase its global aspirations. The commitment to powering a full-size BMW demo by 2025 reflects both ambition and progress, while future plans to add another automotive OEM partner hint at a promising trajectory.
Amping Up on Electrolyte Production
With two manufacturing facilities in Colorado, Solid Power is pouring resources into scaling up electrolyte production. The company’s deliberate approach is evident, preparing to meet future demands with the ongoing construction of a third facility. By securing a vital supply chain from Korea, the company is reinforcing its position in the race for sustainable battery technology.
Operational Excellence on Display
The management at Solid Power has prudently slashed operational costs while pushing the envelope on innovation. Their deft maneuvering is visible in lower-than-expected opex and capex spends, a testament to their pragmatic and efficient stance. It seems that the company is finely tuned to navigate the hurdles of commercialization.
Seasoned Leadership at the Helm
Leadership, especially in an innovative sector, plays a pivotal role in steering the ship. Solid Power boasts a team with deep domain-specific expertise, a crucial ingredient in the melting pot of technological advancements. The management and board collectively possess a wealth of experience and connections, a prism that could refract unique opportunities for the company.
Solid Power’s Sustainable Growth: Navigating Strategic Goals and Valuations
As Solid Power endeavors to carve a niche in the competitive business landscape, it is crucial to evaluate the company’s prowess in realizing its strategic goals and its market valuations. Delving into the company’s financial metrics and technical analysis may illuminate potential areas of growth and investment.
The Valuations: A Lucrative Opportunity
Solid Power’s market capitalization stands at an impressive $309 million, with zero debt and a total liquidity of $422 million as of Q3 FY23. This translates to a compelling market cap/total liquidity ratio of only 73.2%, showcasing an excess liquidity buffer that exceeds the stock’s market capitalization by $113 million.
Despite the current FCF cash burn of $95 million in the TTM, the company boasts approximately 1.2 years till its excess liquidity buffer erodes. Anticipating a reduction in future cash burn and considering the company’s growth potential, confidence in the management team’s capabilities, and the steadfast execution track record, there appears to be a sufficient margin of safety to initiate stock purchases.
While analyzing the P&L may not be as pertinent at this stage due to the company’s focus on commercialization and scale-up, the balance sheet’s liquidity and cash burn provide valuable insights into the resources available to fuel the company’s progress.
Technical Analysis: Charting the Path to Stability
By scrutinizing the relative chart of SLDP vs. S&P500, discernible selling pressure exhaustion suggests a plausible formation of a floor, potentially diminishing the risk of alpha erosion compared to the S&P500. This presents an opportune moment to consider entering the market.
Key Risks and Position Sizing
As an early-stage company immersed in intensive R&D and qualification criteria, Solid Power faces inherent investment risks. However, with a substantial $60 billion addressable market, the potential for asymmetric rewards looms large. Adopting a staged capital deployment strategy, initial indicators of the company’s progress, attractive valuations, and favorable technical analysis may warrant a measured level of investment.
The presence of short interest at 8.57% presents a conceivable short squeeze opportunity, despite the hurdles on the horizon. Consequently, a staged purchase approach seems prudent, with an initial target position of 20% and further future additions contingent on the company’s milestones and accomplishments.
Takeaway
Solid state batteries play a pivotal role in driving mass EV adoption by overcoming current battery limitations, and Solid Power stands at the forefront of developing EV battery cells using lithium-sulfide-based electrolytes. With a capital-light business model and a substantial addressable market, the company’s promising progress in automotive qualification and strategic priorities underscores its potential for growth and value creation.
As the year progresses, a shift in focus toward scaling up electrolyte commercialization, expanding market presence in Asia, and securing partnerships with additional automotive OEMs could further enhance the company’s viability. Bolstered by enticing valuations and indications of stock stability relative to the S&P500, Solid Power seems poised for a promising trajectory.
Investor’s Strategy Into Risky Waters
In the unpredictable waters of investments, the company faces a series of hurdles, particularly related to automotive qualification milestones and the challenge of scaling up electrolyte manufacturing and commercialization. To navigate these turbulent waters, one investor is cautiously approaching the situation. They plan to phase in their buys over time, contingent upon the company’s ability to meet critical R&D milestones, starting with only 20% of their target position at this stage.
Rating: Buy
Furthermore, the company’s board has given the green light for $50 million in share repurchases. While this move is merely an authorization, it reflects the company’s flexibility for potential actions. Considering the company’s current cash burn and their intense focus on commercializing the business model, the likelihood of share repurchases seems slim. Any such unexpected move would trigger a re-evaluation of the investor’s thesis, raising doubts about the company’s capital allocation decisions.
Understanding Hunting Alpha’s Ratings:
Strong Buy: Anticipate the company to outperform the S&P500 on a total shareholder return basis, with a higher level of confidence
Buy: Anticipate the company to outperform the S&P500 on a total shareholder return basis
Neutral/Hold: Anticipate the company to perform in line with the S&P500 on a total shareholder return basis
Sell: Anticipate the company to underperform the S&P500 on a total shareholder return basis
Strong Sell: Anticipate the company to underperform the S&P500 on a total shareholder return basis, with a higher level of confidence
The investor’s views have a typical time horizon of multiple quarters to around a year, though subject to change. They are committed to sharing updates on their stance changes in a pinned comment to this article, and may even publish a new article discussing the reasons for any alterations in view.
