Solid Power (NASDAQ:SLDP) is a $309 million market cap, TTM $20 million revenue company. Its business is focused on providing solid state battery technologies for the EV industry and producing a sulfide-based solid electrolyte for use in solid state batteries. Solid Power currently earns revenue based mostly on meeting milestone targets in joint R&D development efforts with its key OEM partners (more details below). The company is yet to materially scale up commercialization efforts and have a sustainable mode of operations. It is currently unprofitable (more details below). However, I am bullish on the stock as it seems to be making promising progress toward realizing its potential and capturing the large market opportunity ahead:
I am bullish on Solid Power for 5 key reasons:
- Solid Power is making promising progress toward automotive qualification
- The company is well-positioned to scale electrolyte production and commercialization
- There are signs of strong operational execution
- The management team and board of directors have many years of domain-specific experience
- The valuations are attractive
Solid State Electrolytes Primer
Solid state batteries use a solid material (called electrolyte) to facilitate the movement of electrons instead of a liquid material. This is a very key technological development in the EV industry as it would enable safer automotives (liquid electrolytes tend to be more flammable), higher charging capacity and faster charging (solid electrolytes can hold more energy and also facilitate faster movement of electrons), greater durability and lifespan (solid electrolytes can operate in a wider range of temperatures and are more resilient).
Its business model is focused on licensing solid state battery designs and manufacturing processes and in selling lithium-sulfide-based electrolytes to battery manufacturers. Solid Power is a leader in the sulfide-based electrolytes market.
Sulfide based electrolytes are a minority among electrolyte types as oxide-based electrolytes are expected to be more common. However, the key advantage of sulfide based electrolytes is that they are the highest-performing with better connectivity. The tradeoff is that the technology is new and an at-scale manufacturing process still needs to be developed. Also, the supply of lithium sulfide is a key bottleneck.
Solid Power is not involved in commercial battery manufacturing which is a more competitive industry with higher capital barriers to entry and tough margins:
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
By focusing on technology licensing and provider of the solid state electrolytes, Solid Power is able to work with multiple battery manufacturers and EV OEMs instead of compete against them. The addressable market size for the electrolyte business alone is $60 billion:
Solid Power is making promising progress toward automotive qualification
The following table describes the various stages Solid Power must go through to meet the EV OEM standards before the solid state battery technology can be incorporated into EVs:
At the start of 2023, Solid Power was producing Pre-A sample 20Ah and EV cells. (Ah refers to ampere-hour which is a unit of electrical charge; it is a measure of battery capacity). In the FY23 10-K, it was clearly stated that:
A major 2023 goal is to produce EV cells to formally enter A-sample testing.
In the Q3 FY23 10-Q, the company shared that they are executing on these goals as they:
Made first A-1 EV cell deliveries to BMW in October  to formally enter the automotive qualification process. These EV cell deliveries support BMW’s demo car program with additional deliveries projected in the coming months
This is a major milestone for the company that has come after years of R&D efforts. I believe this also places Solid Power ahead of competitor QuantumScape (QS), which has only passed the A-0 stage so far based on the company’s latest commentary in January 2024 (also mentioned in QuantumScape’s Q3 FY23 earnings call). Going forward, Solid Power expects to prove more A-sample designs as it works closely with its OEM partners:
These partnerships are non-exclusive, which is to the benefit of Solid Power as a technology licensee.
The future opportunity looks bright; Solid Power is on-track to be involved in joint development with BMW’s new battery cell center in Germany. As Germany is at the heart of European automotives, this gives Solid Power a good foothold in Europe. There is a major medium-term milestone for Solid Power: In the November 2023 company conference presentation, Deutsche Bank analyst Thomas Maloney asked:
… is the opportunity to power a full-size BMW demo by 2025 still on track?
Management unequivocally stated:
Yes, it is. With these shipments, we’ve now moved to the stage where we’ll be doing detailed planning around that full-size demo car with BMW, with the belief that it will be out and announced in 2024. So with the shipments, with entering a sample and the feedback we’ve gotten so far from them, we’re very optimistic that we’ll have that announcement next year.
– CEO John Scoter in the November 2023 company conference presentation
Solid Power also has a technology licensing agreement signed with SK Innovation in Korea, which is aiming for eventual mass production of solid state batteries. In 2024, further expansions in Korea are due as management plans to make Korea a base for Asian operations going forward. With this solid and growing presence, Solid Power has a strategic priority to add at least 1 more automotive OEM partner. I would not be surprised if it is one of the Japanese automakers.
Overall, I assess Solid Power to be accomplishing its stated goals and being on-track to make steady progress in the technology licensing side part of its business.
The company is well-positioned to scale electrolyte production and commercialization
The company has 2 manufacturing facilities in Colorado; SP1 and SP2:
Solid Power is using SP1 to produce EV-scale cells for its automotive qualification activities. This relates mostly to the technology licensing part of their business model. SP2 is being used to produce lithium sulfide based electrolytes that it intends to sell to EV battery makers. Solid Power has not stated this explicitly, but my research suggests that the reason they chose to expand into Korea is to secure supply of lithium sulfide via Jeongseok Chemical; a key bottleneck for production of their lithium sulfide based electrolytes.
Given this manufacturing footprint and better supply chain stability, Solid Power has sufficient capacity for 2024 and part of 2025 to meet customers’ demands for their solid-state electrolyte. The company is en-route to add a third facility for volume manufacturing in 2026; currently, EPC firms are doing engineering work on that facility’s modular-manufacturing design, which will enable flexible capacity ramp up and utilization.
Management has taken a proactive stance in building out electrolyte production capacity ahead of demand, whilst still having strong visibility of demand:
We have taken an approach to invest ahead of the aggregate demand that’s in the marketplace. And I believe it’s been a key part of the uptake that we have from not only our current partners, but our potential future partners in that these are all very high-volume minded companies in very high-volume spaces. And I think that really differentiates us from the other current providers that are providing electrolyte into the market. In terms of competitors, I think that we’re near the front of the pack with regard to ability to produce high-quality, consistent production to the level that is required by the marketplace.
– CFO Kevin Paprzycki in the Q3 FY23 earnings call, Author’s bolded highlight
In 2024, one of Solid Power’s strategic initiatives is to accelerate revenue scale up via electrolyte sales. Given management’s history in meeting their annual goals, I am inclined to believe management’s narrative here (whilst still being cognizant of the risks, which are discussed later below), especially when also considering the positive industry developments in solid state battery production.
There are signs of strong operational execution
Disciplined operational execution goes a long way to extending the time and resources available to pursue commercialization of new technologies. I think Solid Power is showing good signs here as management highlighted that they expect their opex and capex spends for Q4 FY23 to be lower than expected due to innovative and disciplined cost control:
I want to praise the Ops teams here as these favorable reductions are driven by positive factors… yields have been solid, meaning we have needed to build fewer cells… This translates into less material and labor spend… CapEx side, the team has done a great job optimizing processes and finding more cost-effective ways to structure our SP2 powder line. As a result, we have been able to eliminate some of our planned equipment.
– CFO Kevin Paprzycki in the Q3 FY23 earnings call, Author’s bolded highlight
The management team and board of directors have many years of domain-specific experience
A key attribute that increases the odds of commercialization success is a well-resourced team with deep domain-specific expertise. Looking at the management team, I note that all key leaders have relevant experience in the energy technology field:
Most of the board of directors also have useful early-stage company experience and connections with key automotive OEMs, which I believe is accretive to Solid Power’s capabilities in realizing its strategic goals:
The valuations are attractive
This corresponds to a market cap/total liquidity ratio of only 73.2% as total liquidity present in the company exceeds the stock’s market capitalization by $113 million.
Now the FCF cash burn in the TTM is $95 million. At these current levels of FCF cash burn, the company has almost 1.2 years to go till its excess liquidity (relative to market capitalization) buffer erodes. Given the company’s progress and its 2024 strategic priority of accelerating its revenue timeline from electrolyte sales, I anticipate future cash burn to be reduced. However, I have not baked in this benefit into the numbers.
Overall, considering the growth potential, the steady execution track record, some confidence in the capabilities of the management team, and the excess liquidity buffer implied in the valuations, I believe there is adequate margin of safety in the stock to initiate buys.
As the company is yet to materially commercialize and scale up its business model (most of its revenues currently come from meeting milestones in R&D work with its OEM partners), I do not consider an analysis of the P&L to be very useful. Balance sheet liquidity analysis and cash burn is far more important to assess the resources runway available to fund the company’s progress. Nevertheless, I share the key P&L analysis here for reference:
If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the way I do.
In the relative chart of SLDP vs S&P500 (SPY) (SPX), I note that there has been an incumbent downflow. However, the pushes down are getting weaker, suggesting selling pressure exhaustion. I think this increases the chances of a floor being formed, thus reducing the chances of alpha erosion ahead vs the S&P500. For me, this is acceptable to phase in the buys right now.
Key Risks and Position Sizing
As an early stage company with a lot of R&D, qualification criteria and a lot of manufacturing scale up and commercialization scale up to prove, naturally there are many risks to the investment. However, given the $60 billion addressable market, there is also a large asymmetric reward potential.
In these cases, I evaluate risks and deploy capital in stages. So far, I am encouraged by Solid Power’s progress in meeting its 2023 strategic goals in electrolyte production scale up, progress in automotive qualification and savings on cost. That’s an important indicator of healthy operating momentum. Given these fundamentals, the valuations look attractive and as seen in the technical analysis, the stock has already underperformed heavily vs the S&P500 and seems to be basing out now. The short interest currently stands at 8.57%. I view this as acceptable as it is normal for there to be some shorts on early-stage companies with a lot to prove. In fact, there may be elevated chances of a short squeeze.
However, the path ahead is certainly fraught with many hurdles ahead. Hence, I plan on phasing out my buys. Right now, I will be purchasing 20% of my target position. As the company progresses and accomplishes more milestones, I intend to add to my position.
Solid state batteries are a key enabler of mass EV adoption as they address a lot of the current limitations of EV batteries. Solid Power is a leading company working on the development of EV battery cells using lithium-sulfide-based electrolytes. The company has a capital-light business model wherein it intends to license out the battery development and manufacturing process technology, and sell electrolyte to battery manufacturers. The addressable market is large, valued at $60 billion.
I am bullish on the stock as the company is making promising progress in its journey toward automotive qualification, which would enable its technology to be deployed in commercial EVs. Management met their strategic priorities in 2023 with better than expected cost control. I anticipate the momentum here to continue into 2024 as the company focuses on scaling up electrolyte commercialization, expanding presence in the Asian market and targets to sign on at least one other automotive OEM partner in addition to its current portfolio of BMW, Ford and SK Innovation. I also gain confidence in the management team and board members’ years of domain-relevant experience.
The valuations seem attractive as the company is trading at a 56.4% discount to the total liquidity available in the company. An arguably conservative calculation shows that the company has a bit more than 2 years to go till it loses its liquidity buffer over the current market capitalization of $250 million. Technical analysis indicates some basing of the stock relative to the S&P500, which I believe reduces the chances of continued alpha erosion.
Risk wise, the company still has a lot of hurdles to jump over; automotive qualification milestones being the most challenging, in addition to the scale-up of electrolyte manufacturing and commercialization. In this asymmetric reward opportunity, I am managing the risks by phasing in my buys over a period of time, contingent upon the company continuing to meet critical R&D milestones. Hence, I am initiating my buys with only 20% of my target position at this stage.
Lastly, I note that the company’s board has authorized $50 million for share repurchases. This is simply an authorization; quite a common corporate action move taken by companies to have flexibility, should any action be taken. I do not perceive this as any signal of likely share repurchases. Given that the company is still burning cash and has its full focus on commercialization of the business model, I would be very shocked if the company does repurchase its shares. This would be cause for thesis re-evaluation as it would make me doubt management’s capital allocation decisions.
How to interpret Hunting Alpha’s ratings:
Strong Buy: Expect the company to outperform the S&P500 on a total shareholder return basis, with higher than usual confidence
Buy: Expect the company to outperform the S&P500 on a total shareholder return basis
Neutral/hold: Expect the company to perform in-line with the S&P500 on a total shareholder return basis
Sell: Expect the company to underperform the S&P500 on a total shareholder return basis
Strong Sell: Expect the company to underperform the S&P500 on a total shareholder return basis, with higher than usual confidence
The typical time-horizon for my views is multiple quarters to around a year. It is not set in stone. However, I will share updates on my changes in stance in a pinned comment to this article and may also publish a new article discussing the reasons for the change in view.