It’s fair to say the market is warming up to the potential lithium metal battery startup QuantumScape (NYSE:QS) stock holds. The stock is up 23% year-to-date and that’s after it lost 60% of its value in late summer. There’s a tectonic shift underway in battery technology as the EV market expands and it seems likely QuantumScape will be a big part of it. Faster charging and longer range will boost EV acceptance.

That’s what QuantumScape offers. Even if its advances are just the next step in the evolution of EV batteries, the advances the battery maker is making could be financially substantial for it. Let’s see how QuantumScape is progressing and whether the trajectory of QS stock should be one significantly higher.

QS Stock Leapfrogging forward

QuantumScape reported third quarter financial results that pleasantly surprised the market. Net losses were only $0.23 per share, a nice improvement of the $0.27 per share loss last year. That also handily trounced analyst estimates. Yet, because they were really non-operational improvements, investors shouldn’t get too excited about it.

The losses narrowed because of earning greater interest income and a onetime unrealized gain on its short-term investments. That has nothing to do with how the business is running, so any enthusiasm should be tempered by that.

Except the business is improving. QuantumScape also announced its best-performing prototype battery cell the A0 is far exceeding expectations. The battery maker is looking for its batteries to achieve 800 cycles with 80% energy retention. The A0 reached 1,000 full cycle equivalents with over 95% discharge energy retention. 

QuantumScape says it is “not aware of any automotive-format lithium-metal battery that has shown such high discharge energy retention over a comparable cycle count, at room temperature and modest pressure, regardless of C-rate.”

C-rates are the charge/discharge rate of batteries. A battery’s capacity rated 1C means a fully charged battery rated at one amp hour should provide one amp for one hour. The same battery discharging at 0.5C should provide 500 milliamps for two hours, etc.

What’s really of note is the A0 is using the same specification as QuantumScape’s first commercial product, QSE-5. The QSE-5 will have higher-loading cathodes thean the A0 and more efficient packaging. This really advances the potential for QuantumScape’s commercialization plans.

Don’t get too excited yet

QuantumScape is collaborating closely with “a prospective launch customer in the automotive sector” for the QSE-5. So someone is interested in using this technology when the battery maker goes commercial. But that won’t be for a few years yet. And its scale is fairly small at the moment. 

It is looking to prove they will be viable across all types of EVs, from passenger and commercial vehicles, to sports-oriented motorsport types. Proof of concept testing is vitally important, but QuantumScape isn’t ready to be putting its batteries into EVs anytime soon.

Which means the battery maker is going to be producing more losses than batteries for the foreseeable future. To keep the lights on, it’s going to need to continuously raise cash. Earlier this year it sold earlier $288 million in new stock. To its credit, QuantumScape now has $1.1 billion in the bank and no debt, a major achievement for a startup, so future dilution will be minimal, at least for a while.

Crimping QuantumScape’s style

But the potential for a lithium shortage could throw a wrench into the system. According to data from BMI, a Fitch Solutions company, the “global lithium supply is expected to enter a deficit relative to demand by 2025.” That could severely crimp QuantumScape’s supply while at the same time raise costs.

The other potential problem is simply falling EV demand. Manufacturers are reporting swollen inventories and Ford (NYSE:F) just announced it is cutting production of its F-150 Lightning due to a lack of sufficient demand.

That means investors should tread lightly here. QuantumScape stock looks like it could be an eventual winner, but it’s not time to back up the truck. An investment here should only be for the smallest, high risk section of your portfolio.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.