Solid Power (NASDAQ:SLDP) has three pillars to its plan for commercializing its next-generation battery technology: the JDA with BMW (OTCPK:BMWYY), the agreement with South Korean Battery company SK On, and the perceived technical advantages of its technology. In this article, I will suggest that cracks are showing in all three of these pillars, and as I suggested in my first article on SLDP, it is being swamped by the competition.
This is the third article in a series covering next-generation battery makers. The first was on QuantumScape (QS) where I decided not to invest. The second was on SES AI (SES), where I decided not to invest yet but expect to invest in the future. This third one on SLDP follows my first review of SLDP from Oct 2023, when I expressed concerns about SLDP and the competition. I rated SLDP a sell then when the price was at $1.64; today it is at $1.43, and I think it will go a lot lower, as a result, I am reiterating a Sell rating.
The business model of SLDP is straightforward: its core technology is a solid electrolyte material, and SLDP is developing solid-state battery cells using the electrolyte. SLDP intends to grow revenue by selling electrolyte material and licensing its cell designs. It may also sell cells and batteries to low-volume customers.
Customer concentration
SLDP has a highly concentrated customer base, and its concentration is worsening. In 2022, 4 customers provided 82% of revenue; by FY2023, that figure had changed to two customers delivering 89% of revenue. (10K FY 2023).
SLDP is having trouble developing new customers
In Q1 2024, SLDP announced they had shipped electrolyte to two new customers, with repeat shipments to one. In Q2 earnings, the CEO said the target was 15 customers, and they had shipped product to 10. In Q2, the CFO reduced revenue guidance for 2024, saying the uptake in sales of electrolyte had been slower than expected, and, in the Q & A section, the CEO said, they had expected to ship measurable quantities of electrolyte to last year’s new customers, but that had not happened.
The CEO did say in his prepared remarks that SLDP had increased the volume of electrolyte shipments with many repeat customers. He also said that SLDP hopes to sign a new global customer in South Korea, and they are repeat sampling with customers in South Korea as well as Japan.
The automotive sales cycle is long, with multiple testing phases before a product goes into production. A customer sampling SLDP electrolyte in 2024 is unlikely to become a significant volume customer by the end of the decade. The fact that prospective customers are not developing as hoped is a large negative. All companies need customers, and SLDP is struggling to find new ones.
SLDP is not doing well with its current customers
At present, SLDP has agreements with two companies that have the potential to be huge customers, here, I will suggest that the chance of these two becoming large customers has dropped significantly over the last few months.
I will suggest that BMW has moved away from SLDP and is unlikely to use its technology in the medium term, if at all, and that SK On has run into financial difficulty that puts the SLDP/SK On relationship at risk.
BMW
BMW and SLDP are currently re-negotiating their JDA agreement. The current JDA was extended into Q3 to allow this (CEO Q2 2024). In the earnings call, the CEO of SLDP said the extension will be about improving cell design and performance for future BMW solid-state cell lines.
SLDP had said that a BMW demonstration car would be showcased this year, proving the superiority of SLDP products. That plan has been shelved, and BMW has paused cell deliveries.
The SLDP CEO said this was because they are waiting for the new A2 sample cells, and pointed to the new electric platform BMW is launching as a further reason for BMW not focussing on the SLDP demonstration vehicle. It seems reasonable, but I am not buying it.
SLDP is one of several next-generation battery companies BMW is working with, and it has always been my concern that another technology would prove to be a better fit than SLDP. There is evidence that this is happening.
It may be that BMW decided not to build a demo car using SLDP battery technology because it had decided to make one with a competitor technology.
BMW has demonstrated a new vehicle with a battery from Our Next Energy (ONE), a US start-up. The SUV traveled nearly 1,000Km on a single charge. We expected to see an SLDP-powered showcase vehicle travel a long distance but got one from a competitor.
BMW invested in ONE in 2021, in 2022 they announced the plan to build a demonstration BMW model using a ONE battery system with a target of 965 Km range. As a proof of concept, ONE retrofitted a Tesla (TSLA) Model S and achieved a 1,200 Km range. ONE batteries have a clear competitive advantage over SLDP, they are proven to be manufacturable. ONE batteries use LFP chemistry, an industry standard, and boast an industry-leading 3,000 cycles, suggesting ONE batteries will last three times as long as SLDP ones.
The advancement is the architecture. The Gemini battery used in the BMW demonstration car has two cells: the LFP chemistry is used for short trips and an anode-free cell for longer trips. A converter moves energy between the two cells. The anode-free cell has 1,007 Wh/L, which provides extra power to deliver the 1,000Km range.
The decision by BMW to build the ONE powered vehicle and not the SLDP powered one might be speaking volumes. The performance of the ONE car is of huge concern for SLDP. 1,000Km on a single charge with a product that is already manufacturable and without any imminent safety concerns.
BMW is about to launch its Neue Klasse range of cars and wants 50% of all of its cars to BEV by 2030. They are building or expanding 5 battery manufacturing plants local to the car factories producing these vehicles. Two will be built in Europe, and one each in China, the US and Mexico. The all-new BMW cylindrical cells promise a leap in charge time and range performance.
The Neue Klasse will be the first to incorporate the all-new cylindrical cells. These represent a technological leap by the BMW Group, offering vastly improved energy density, charging times and range. They will be assembled in new facilities located as closely as possible to vehicle plants, in keeping with the principle of “local for local”. State-of-the-art assembly plants for sixth-generation high-voltage batteries are currently under construction in Irlbach-Strasskirchen (Lower Bavaria), Debrecen (Hungary), Woodruff (near Plant Spartanburg in the US), Shenyang (China) and San Luis Potosí, Mexico.
(Link: Where the BMW Group will make its next generation of high-voltage batteries)
The first Neue Klasse car will be built in Europe next year, with work ongoing at a new battery facility. Production will begin in China in 2026 and in Mexico in 2027
Assuming the new cylindrical battery is successful, then it should have a minimum 5-year life span, suggesting that BMW may not be looking at volume production of a new battery technology before 2032 at the earliest.
ONE already has a manufacturing site and could supply batteries to BMW for specific models. SLDP is in the early development stage and appears to be a long way behind.
BMW is SLDPs flagship customer, and they have committed their medium-term battery technology elsewhere. BMW has built a demonstration car delivering the performance promised by SLDP using next-generation technology from a different supplier. They did not build the much-vaunted SLDP-powered demonstration car and have not yet signed a new JDA following the expiration of the previous one.
BMW deal is no longer the high-probability marque customer it once seemed to be.
SK On and Ford
The second major customer for SLDP is SK On and by default the Ford Motor Company (F). This relationship looked very promising when I wrote my first article on SLDP and shortly after it was published SK On and SLDP announced a new agreement that would see a new electrolyte production line built at the SK On site in South Korea and an off-take agreement signed ensuring minimum volume for SLDP.
In the latest earnings call, the CFO said he expects SK On revenue to be recognized in 2025 when he reduced guidance for the year from $22.5 million to $18 million (mid-point).
SK On is in trouble, it has financial difficulties caused by unexpectedly slow growth in electric vehicle sales. SK Group has decided to sell its stake in SK On and has begun discussions with potential buyers. SK On is a subsidiary of SK Innovation, a holding company part of the SK Group.
SK On supplies batteries to Ford, Volkswagen, and Hyundai amongst others. They have a factory jointly owned by Ford in Kentucky. Of the three major customers quoted by SK On, only Ford is looking at SLDP, Volkswagen is investing heavily with QuantumScape and Hyundai has moved to B sampling with SES AI (SES).
Like BMW, Ford is building its next generation of battery manufacturing sites, suggesting it will stay with LFP chemistry into the next decade.
SK On urgently needs additional capital. The linked article suggests that SK On does not have the money to expand its battery market share or complete the planned US facility expansion. The article points out that SK On is losing huge amounts of money $1.8 Billion (2.4 trillion won from the linked article) 2022- date. Q1 this year showed little improvement. If SK On is not sold, it will have to cut costs and the SLDP joint venture which does not look like it can develop revenue this decade could be in the firing line. If SK On is sold, it will depend very much on who it is sold to, if the new owner already has a next-generation battery technology SLDP may find itself without any major partners in a very short space of time.
SLDP Technical Superiority
The selling point for SLDP shares has always been the technological superiority of potential products. Here I suggest that this perceived superiority does not currently exist.
From 10K FY 2023
Prior to reaching commercialization, we must improve our products to ensure they meet the performance and safety requirements of our customers. We also will have to continue to negotiate licensing and supply contracts with our customers on terms and conditions that are mutually acceptable. We will need to scale production of our electrolyte material to satisfy anticipated demand.
SLDP is still working to improve its technology, whereas the competition is rushing towards commercialization. Solid electrolyte was meant to be safer with better performance than the competition. However, SLDP reported a thermal runway in a handful of the A sample cells produced for BMW (Q2 2024) and the electrolyte is still not delivering the performance required by the OEMs they are dealing with.
Multiple competitors are delivering manufacturable technology that delivers the performance improvements promised by SLDP, these technologies may not be as technically elegant as the SLDP solid electrolyte, but that matters little. The competing technology is cheaper, manufacturable, perhaps safer and, most importantly, is delivering the required performance.
As I predicted in my first article, SLDP is being swamped by the competition.
SLDP Finances
Since its inception, the primary source of income for SLDP has been from the 2021 SPAC merger. They have not yet delivered meaningful sales revenue or positive cash flow; however, they started a $50 million share buyback scheme, an unusual move for a company so far from commercialization.
I do not like this move, they sold shares to the market for $10 at launch, have not yet developed a commercial product, and are now buying back shares for less than $1.50. Selling high and later buying low is the aim of short sellers, not new technology companies.
Worse, the company will likely need that money in the future. The balance sheet summary below is a snapshot of SLDP finances at the end of the last reported quarter.
SLDP Balance Sheet (Author Database)
SLDP has positive shareholder equity of $460 million and zero debt, with total assets of more than $490 million and liabilities of only $36 million, its balance sheet is rock solid and flawless. In the Q2 earnings call, the new CFO reported total liquidity of $359 million.
The next chart is somewhat complicated, but it shows where SLDP is spending its money, including any cash generation.
Income Statement Chart (Author Database)
SLDP has $160 million in current assets and $218 million in investments in its long-term asset schedule. The long-term investments are a mixture of corporate bonds, government bonds and commercial paper, so they should be considered fairly liquid and easily accessible. (10 Q 2024 Q2)
The upshot is we can assume SLDP has $378 million of accessible liquidity (slightly more than the CFO stated in Q2 earnings) it would give them a cash runway of less than 2 years on the TTM figures in the chart above.
I do not believe SLDP can hit cash flow generation in the time frame allowed by its balance sheet and will inevitably need to raise more cash in the medium term.
Conclusion
SLDP is in a difficult position, and the competition is progressing to the market far quicker than it seems able to.
SES is already B sampling with two major OEMs.
ONE has a manufacturable product that has proven its ability in a BMW demonstration car.
SLDP is years behind and hopes to move to A2 samples with BMW later this year.
SK On is in financial difficulty, and its owner is looking to offload it. Two of SK On’s largest customers are moving ahead with SLDP competitors, reducing the perceived value of SLDP to SK On’s owners at a time when they need to cut costs.
New customers have not developed the way SLDP had hoped and did not take the volume deliveries hoped for, leading to a reduction in forward guidance.
The balance sheet looks solid at the moment, but future cash needs mean they will likely need additional cash within two or three years. Despite this, they are spending cash on buying back shares that they will inevitably have to sell again.
I have never held SLDP shares, however, if I did, I would be considering the opportunity cost of holding them any longer. It might be time for long-suffering SLDP shareholders to sell and move on.
If SLDP is ultimately successful, it will be many years before it generates meaningful revenue and shareholders see any positive return. I think the probability of that success is low, I thought the competition would swamp SLDP, and I believe that scenario is playing out.
I am not a short seller and rarely award a sell rating; this is the first one of 2024. I awarded 6 in 2023 and all 6 are down in value by an average of 39%.
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