The Big Idea
Every consumer in the world wants a battery that lasts longer, is more powerful, charges faster and is lighter. Assuming it’s safe to use of course.
It doesn’t matter if you are a super technology user, an Average Joe, a member of the U.S. Navy SEAL Team or an EV owner.
The bottom line is that when it comes to battery power more, longer and faster is the name of the game.
And it has been since batteries were first invented.
The big difference now is that governments and manufacturers around the world are trying to put batteries into everything. And that’s upping the stakes considerably.
It’s one thing if your watch or smartphone dies because you didn’t plug it in in time. That’s an inconvenience, but probably not dangerous.
Not the case if you’re sitting in traffic on the interstate in the middle of winter or during a storm and your EV runs out of juice.
That’s a big enough problem for the minority of drivers today, but what about in a decade if EV growth projections prove accurate?
I doubt AAA is ready to send a tow truck for 20% (or more) of the cars on the road!
Bloomberg estimates that battery demand for electric transportation will expand from 626 GWh/year (gigawatt hours per year) this year to 1,421 GWh/year in 2025 and over 5,000 GWh/year by 2035.
We can’t get there if there’s risk of people getting stranded doing their daily commute.
Or what about for a member of the U.S. Army who’s relying on batteries to power all their gear? Some members of the armed forces are carrying well over 50 pounds of battery-powered gear. The batteries themselves can weigh 15 pounds.
These soldiers could move a lot faster if these batteries were lighter and lasted longer. They also need to take a bullet and still work.
The bottom line is that the battery market is expected to grow at about a 14% average annual clip over the next twenty or so years as batteries creep into more and more things and our reliance on them grows.
To make that happen there’s a ton of money flowing into battery development.
Today’s new portfolio addition is one of the new batch of players. It has a multi-year head start over its fellow upstart competitors.
And it is already working with at least four of the mega-cap technology companies, not to mention the U.S. Army.
It’s far from a slam dunk investment. But despite the challenging market there are enough encouraging signs to take a swing at what could be a home run if enough goes our way.
Enovix (ENVX) is a California-based battery architecture company developing a 100% silicon anode battery for consumer electronics (now) and electric vehicle (EV) markets (down the road).
The company was founded in 2007 and came public through a SPAC merger on July 12, 2021. Its strategy for improving the energy density of a battery, as compared to mass-market lithium-ion (Li-ion), batteries is to alter the internal structure.
This is intended to address the challenges of silicon (versus graphite) while also taking advantage of silicon’s significant performance benefits.
The end result is a battery that (we believe) has superior energy density, high cycle and calendar life, charges quickly (0% to 98% charge in under 10 minutes) and is safe for use in wearables, in mobile devices and in EVs.
Comparisons with current batteries used on consumer devices can be seen in the slide from Enovix’s investor presentation below.
While Enovix has a different approach to battery architecture, its approach is somewhat agnostic to materials and manufacturing process.
The image below illustrates the high-level production process, which includes three steps. Enovix basically swaps out the graphite anode for silicon then takes an existing standard three step production process, drops its process into step two (cell assembly and pre-lithiation process in place of the standard wound cell assembly process), and is off and running.
This is an early-stage company and so there are risks.
However, Enovix has made considerable progress on both the product development and production fronts. It has also completed technical qualifications with three mega-cap consumer electronics companies (i.e., strategic accounts) that likely include one or more of Apple (APPL), Alphabet (GOOG), Amazon (GOOG), Tesla (TSLA), Samsung and/or Meta (META). Enovix also generated engineering/service revenue of $5 million from a fourth strategic account in Q2 2022.
Finally, the company is working with the U.S. military to build wearable battery cells for U.S. Army soldiers.
The Platform & Manufacturing Plan
In theory, silicon anodes can store more than twice as many lithium ions than the graphite anodes that are used in almost all lithium-ion (Li-ion) batteries today. But silicon’s high energy density creates a few significant problems, including a higher rate of swelling/pressure upon charging/discharging and Li-ion loss acceleration. Li-ion loss is also a function of the swelling/shrinking cycle and gets worse through discharge cycles.
Enovix addresses these challenges with its battery architecture. It runs electrodes so they face the short side of the battery (versus wrapping them in a coil) then wraps the battery with stainless steel. The net effect is limited swelling, limited lithium-ion loss and longer battery life.
Beyond Enovix’s underlying technology, the manufacturing ramp-up strategy is a key part of this story. To state the obvious, the company may have a great battery solution, but if it can’t manufacture it at scale the story is dead in the water.
Currently, Enovix is making batteries at Fab-1, its Freemont, California plant. Management says first commercial cells shipped in June 2022.
In Q2 the company disclosed that much of Q3 would be used to make manufacturing equipment improvements (referred to as “Gen2”) to Fab-1 which would take it offline but dramatically improve yields and help it meet demand.
The Gen2 improvements will also inform designs for the next manufacturing plants, Fab-2 and Fab-3, which are planned for the U.S. and Asia. Note that Q3 just ended.
Secure Contracts with Mega-cap Customers: Management is working with four mega-cap companies, which hints toward Apple, Alphabet, Amazon, Tesla, Samsung and/or Meta, as well as many smaller potential customers. It recognized $5 million in commercial sales from one of these mega-cap customers in Q2, but no big contract has been announced yet. If and when sizeable contracts are announced the stock should respond favorably.
Expand Product Pipeline: Enovix is starting with wearables, intends to expand into eyewear and headsets next, then potentially move on to computers. EVs represent a massive market and longer-term opportunity, however, the company will need a manufacturing partner or licensing arrangement.
Partnership and/or Licensing: For Enovix to break into the EV (or mobile device) market the company will need some sort of stake investment, joint venture partnership, strategic partnership with auto manufacturing platform and/or a non-strategic partnership. Any of these could be positive catalysts for the stock, with a stake investment or JV partnership most likely to be the biggest positives.
Move Customers Through Revenue Funnel: At the end of Q2, Enovix had $1.09 billion in engaged designs and $414 million of both active designs and design wins (see The Business Model for more on these categories). This represents a revenue funnel of $1.5 billion if all projects are approved. They most likely won’t be, but it gives investors an encouraging sense of what’s going on in terms of customer engagement.
Grow in Military Market: Enovix estimates the military battery market to be worth around $350 million annually. It has fulfilled a first, as well as a follow-on, evaluation contract for the U.S. Army. Its batteries are being tested in the WarFighter power source, which includes over 15 pounds of batteries now. Enovix might be able to slash that weight and improve performance.
Ramp up Production in Fab-1 and Get Going on Fab-2 and Fab-3: Fab-1 is supposed to be ready to ramp up in Q4 (i.e., right now) and Fab-2 and Fab-3 should get going in the second half of 2023. Achieving these manufacturing milestones is key.
Integrate BrakeFlow Technology: Safety is a concern with all battery types but especially in the Li-ion battery market. To better address these concerns, Enovix created BrakeFlow. The very short version is BrakeFlow adds a set resistor into the battery to reduce overheating in the even of an extreme event. The technology is being incorporated into the Gen2 production line.
The Business Model
Enovix is both a technology company (it owns IP related to its battery design) as well as a manufacturing company. Revenue is generated from engineering services (bulk of revenue now) and product revenue (essentially zero now but should ramp up). In terms of go-to-market strategy investors should watch the sales/revenue funnel which progress from (1) engaged designs to (2) active designs and finally to (3) design wins. Engaged and designed wins are mostly services revenue, whereas design wins open the product revenue spigot.
The Bottom Line
Enovix generated its first revenues in Q2 2022, bringing in $5.1 million. Most of that was service revenue from completing the initial phases of a product development program. The company shipped Fab-1 cells to 10 OEMs and four distributors that will be used for prototypes, product qualifications and end products for field trials. Adjusted EPS was -$0.13.
Enovix ended Q2 with $385 million in cash. The company will likely need to raise capital by the end of 2023 and/or receive funding from a DOE loan, partnership, licensing arrangement and/or JV.
Given that Enovix is still early in its production ramp curve it’s likely that most revenue in 2022 and 2023 will be from engineering/services, then, if/as Fab-2/3 come online, product revenue will ramp into the end of 2023 and into 2024.
For 2022 management has guided for $6 to $8 million in revenue. That could ramp up to $25 to $30 million in 2023, then could jump into the $140 to $180 million range (or more) in 2024. Don’t expect profitability for several years.
Limited Supply: Based on management commentary it sounds like demand isn’t the problem right now. Rather it’s supply. While that could change in time, Enovix can’t simply turn on the tap – the company needs to cultivate customer relationships then fulfill what it can in a timely fashion.
Production Misstep: Enovix is largely a manufacturing story, and as such, the company needs to execute well on its plan to get production lines up to speed. Any issues could hurt confidence from customers and investors.
Competition: Stating the obvious here … there are a lot of competitors in the battery market and a lot of considerations from OEMs before they give the green light to the new kid on the block. Enovix will have to win, then win again and again and again.
Market Expansion: Enovix plans to start in the wearables market then expand from there. Assuming the first part goes well, there’s no guarantee the company will succeed breaking into additional markets.
Capital Raise: Manufacturing requires capital, and with $385 million at the end of Q2 2022, Enovix will likely need to raise capital by the end of 2023 and/or receive funding from a DOE loan, partnership, licensing arrangement and/or JV.
Enovix competes with established battery companies out of Asia including Panasonic, CATL, Samsung and LG Energy. Smaller competitors include Solid Power (SLDP), QuantumScape (QS), SES (SES) and Varta. Younger upstart competitors include Amprius Technologies, Enevate and Sionic Energy.
Trading Volume: ENVX trades an average of 4.4 million shares daily.
Historical Price: ENVX was trading near 20 when it came public in July 2021 via SPAC merger. The stock slipped to a low of 13.3 a month later. Then it was off to the races. ENVX steadily climbed and traded as high as 39.5 last November. That was the all-time high and shares slid into the end of the year, then kept trending down into the middle of 2022. The low looks to be 7.3 on May 12. After a false start in June and another dip below 9 in July, ENVX took off. Shares gapped up following the Q2 report on August 10 and closed above 20, then climbed as high as 25. Since then, the stock has mostly traded in the 18 to 26 range. With shares just under 20, ENVX seems to be offering a decent entry price now.
Valuation: Enovix has a market cap of $3.1 billion. With just $5 million in Q2 sales and limited revenue projected for 2023, valuation is not that helpful here.
Buy Range: Expect to buy in the 18 to 26 range in the near term.
The Next Event: Q3 earnings in early November.
Updates on Current Recommendations
|Stock Name||Date Bought||Price Bought||Price on 10/5/22||Profit||Rating|
|DigitalOcean Holdings (DOCN)||6/2/22||48.9||-||-||SOLD|
|Evolent Health (EVH)||9/2/22||36.7||37.1||1%||Buy|
|Flywire (FLYW)||8/4/22||24.6||24.8||1%||Buy Half|
|Inspire Medical (INSP)||10/4/19||58.5||189||223%||Hold|
|Procept BioRobotics (PRCT)||3/3/22||25.0||41.3||65%||Hold Half|
|Rani Therapeutics (RANI)||10/7/21 & 7/28/22||14.2||9.51||-33%||Hold|
|Repligen (RGEN)||11/2/18 & 12/31/18||59.2||220.6||273%||Hold|
|Sprout Social (SPT)||9/3/20||36.5||67.5||85%||Hold Half|
|TransMedics Group (TMDX)||7/7/22||34.1||44.1||29%||Hold 3/4|
Please email me at email@example.com with any questions or comments about any of our stocks, or anything else on your mind.
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.
Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.
The next Cabot Small-Cap Confidential issue is scheduled for November 3, 2022.