SES AI Corp: Powering Future EVs With Its Li-Metal Technology (NYSE:SES)

Concept of a home battery energy storage located in a garage with a sunny background with lawn car, family house and big city. 3d rendering.

Petmal

Summary

I recommend a buy rating on SES AI (NYSE:SES). The company is focused on developing and manufacturing hybrid Lithium-Metal rechargeable batteries for EVs and other applications. SES’s superior Li-Metal technology enables it to take the lead in the global transition to electrification, already setting a high barrier that protects its technology, making it difficult for competitors to catch up. SES also plans to further reduce the costs in the long run through long-term contracts and vertical integration.

Company overview

SES AI develops and manufactures high-performance hybrid Lithium-Metal rechargeable batteries for electric vehicles and other applications. SES Li-Metal batteries were created to combine the high energy density of Li-Metal with the low cost and large-scale manufacturability of conventional Li-ion rechargeable batteries.

Global transition to electrification

It’s evident that many nations, corporations, and investors all across the world have made electrification their top priority. I agree that the transition to a more sustainable form of energy around the world will create significant commercial opportunities for rechargeable batteries, particularly in the automotive industry. According to SES S-1, the market for EV batteries is projected to grow from around $19 billion to approximately $350 billion over the same period, which corresponds to the projected global sales volume of approximately 66 million EVs by the year 2040. To seize this opportunity, it will be necessary to develop cutting-edge battery technology, such as the SES, that can both reduce production costs and boost energy density.

Several governments and leading global OEMs have both set ambitious goals for electrification, which is causing change to happen quickly. The United States, for example, proposed $174 billion to expand the EV market and cut greenhouse gas emissions in half by 2030, while Canada declared that all new light-duty automobiles and passenger trucks sold would be zero-emission by 2035.

In addition to what governments and businesses are doing, more and more investors around the world are looking at the energy transition as an investment opportunity and have put record amounts of money into funds that help the environment. For instance, several investors have asked businesses to explain how their business models will work in a net-zero economy. EVs are also becoming more popular with customers.

I believe that SES’s advanced technology will enable it to take the lead in this process, creating value for both shareholders and society as a whole. Because of these public and private sector efforts, the global market for EV batteries is expected to grow significantly, with increasing battery pack sizes and lower costs. The resulting increase in demand for EV batteries is estimated to raise the entire addressable market.

SES Li-Metal technology

It is anticipated that Li-Metal batteries will feature smart technology in addition to being more lightweight, having a higher energy density, being safer, being able to charge more quickly, and having a lower cost than Li-ion batteries. The company believes that the expected energy density of the SES Li-Metal battery technology will help to enable the expansion of an electrified world. The current 4 Ah multi-layer battery cells used by SES are capable of achieving up to 80% charge in less than 15 minutes during rapid charging, which boosts confidence in the company’s capacity to deliver industry-leading performance. In the long run, the SES batteries are expected to be much cheaper than their competitors. They will also be able to charge more quickly, last longer, and be safer than their competitors.

The innovative approach of SES to Li-Metal is intended to provide batteries with both high energy density and excellent manufacturability. SES is sure that its Li-Metal batteries can meet or exceed its clients’ needs for performance, safety, and cost. This is because of their unique and innovative design, which is made possible by cutting-edge proprietary materials and software.

Tech

S-1

Most people agree that Li-Metal is the EV battery technology with the highest energy density. In fact, management claims that switching out the graphite/silicon anode currently used in Li-ion batteries with one made of Li-Metal will result in the maximum energy density attainable for any given cathode in lithium chemistry. Lithium metal is the lightest pure metal on Earth that has not been re-engineered. Also, lithium metal anode battery cells can be very small and light because lithium ions don’t have to move in and out of the anode host material. This lightweight anode produces the maximum possible gravimetric energy, and the compact anode has the volumetric energy density for any given cathode in lithium chemistry.

Tech

S-1

Very high barriers to entry

To get a foothold in the industry, you need to know a lot about how it works. Over the past nine years, SES has spent about $100 million on high barriers to protect its technological advantage. As of September 30, 2021, the company had 54 patents, 57 patent applications that were still being processed, and 25 trade secrets.

Path to further reduce cost

The reduction of costs will continue to be a crucial pillar supporting the expansion of the EV industry and SES’s future growth. The business does not currently have any long-term supply arrangements, but they anticipate entering into long-term contracts as its volume increases in the near future. Even so, SES plans to look into the possibility of both upstream and downstream partial vertical integration, in addition to the deals it has already made with suppliers.

My opinion is that acquiring both upstream and downstream participants in their supply chains is the best way for Li-ion battery cell manufacturers to achieve the goals of vertical integration, which are to lower their costs, increase their competitiveness, and streamline product development and commercialization for OEMs. Upstream, SES could investigate the possibility of merging providers of important equipment and engineering expertise, as well as vendors of key materials used in its cells. Downstream, SES may look into the possibility of integrating important engineering capability suppliers, such as software to monitor the health of batteries, software to optimize charging, software to build new battery modules, and software to recycle batteries.

Valuation

At the current stock price of $5.59 and 348.2 million shares, the market cap is ~$2 billion. I believe the current valuation does not reflect SES’s long-term potential value. I expect SES to make $5.4 billion in sales in FY39, giving it a market cap of $21.5 billion and a stock price of $61.83 in FY39, assuming a terminal growth rate of 3% and a discount rate of 10%.

Assumptions:

  1. Sales will track management’s projections until FY28, and then they will decelerate to match inflation over the next decade. The basis for growth deceleration is that once SES reaches maturity and the easy wins have been taken, growth should slow.
  2. FCF margin: Similar to revenue, I used management estimates for the first few years, and assumed that the SES margin would stay flat moving forward. Due to cost rationalization, there is a good chance that the FCF margin could get even better, which would be an upside I didn’t account for in my model.

The key thing to highlight here is that I assumed management could hit their guidance. My model indicates that the market is not pricing in any of these upsides at all, hence the opportunity for investors

Valuation

Nomad Capital

Risk

Requires additional financing

SES has a track record of negative revenues and net losses, and the company anticipates that trend to continue into the foreseeable future at least. Developing, designing, manufacturing, and selling batteries is a capital-intensive business. SES expects to need financing and to have large operating costs for several years without making enough money to cover those costs.

Li-Metal technology is untested

SES is aware that performance and safety test results for Li-Metal battery cells are the only ones that have been published, and that these results come from tests done by third-party testing labs. SES has not produced Li-Metal batteries for use in an actual EV, and no one has shown that high energy density Li-Metal batteries can be used in EVs. It is possible that the Li-Metal battery cell technology developed by the company would not function properly when applied to actual electric vehicles, which would be a significant blow to the company’s bottom line.

While traditional Li-ion battery technology has been tried and tested in a wide range of applications for several decades, Li-metal battery technology is relatively new. Even if SES collaborates with OEMs to perform exhaustive testing of Li-Metal cells under a set of predetermined conditions, there is no way to guarantee that users in the field will not drive in conditions that deviate from the recommended driving conditions and unintentionally abuse the batteries.

Conclusion

The current valuation presents an amazing opportunity for investors to take advantage of a huge mispricing. I believe its industry-leading technology in global electrification will allow it to capture more market share. SES’s current valuation and future market share, combined with effective risk management for financing and technological innovation, provide investors with an opportunity to purchase shares of this innovative and well-positioned company.

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