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Small-Cap Confidential
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November 2, 2022

Of the many scenarios I considered for Enovix (ENVX) following Q3 earnings, seeing the stock down 40% was way down the list. Clearly the risks are relatively high with a stock like this – not unlike an early-stage biotech company – but so too are the potential rewards.

ENVX and INSP Report

Of the many scenarios I considered for Enovix (ENVX) following Q3 earnings, seeing the stock down 40% was way down the list. Clearly the risks are relatively high with a stock like this – not unlike an early-stage biotech company – but so too are the potential rewards. Today the risks have overshadowed everything else. That said, putting the stock’s reaction aside for a minute, the big picture here isn’t materially different today than it was 24 hours ago.

The major takeaways from the earnings release, conference call and question and answer session are as follows.

Enovix is moving even more internal resources from the Gen1 line to the Gen2 line to leverage more of what’s been learned over the last few quarters into that line. This strategy is consistent with what we expected, just a little more aggressive. The upshot is Gen2 should have better yields and output, but near-term production from Gen1 goes down. This doesn’t seem like huge deal in my view because Gen1 isn’t sufficient to supply commercial quantities for large customers anyway. Better to get Gen2 right since that’s the future.

If things go as planned Gen2 equipment gets installed mid to late 2023 and is up and running to fuel commercial production/support product launches in 2024. Each Gen2 line should be able to do around nine million cells.

There is more than a little speculation that Enovix is working closely with Apple and/or Samsung to support smart watches, smartphones and laptops. The MOU (non-binding) that Enovix pushed out just prior to the press release doesn’t disclose the customer, but management confirmed it is the same as announced in Q2 that they were working with on smart watches. Both of these companies have a history of funding capex investments with suppliers so they can support sufficient quantity production. If and when that day comes we will know, and it would mostly likely wash away the stain from today’s drop.

Ultimately, Enovix remains on the same path as before with just a slightly altered trajectory. The major disappointment today is likely that there is no concrete “deal” announced and investors may be getting a tad impatient that commercial-type quantities aren’t rolling out in 2023. A looming Fed meeting and associated uncertainty for stocks in general is also casting a shadow today.

For now, Enovix remains in our portfolio with a buy rating. I do think we’ll get a decent dead cat bounce in the coming days (Fed commentary may influence the size of this) so those looking to play a rebound and average down could consider adding to positions today. It depends on if you have a “full” position already or not.

If this is your plan, I suggest waiting until this afternoon since things will be a little less murky after the Fed speaks (i.e. you can better gauge broad market momentum).

For those with lower risk tolerance, just sitting and waiting is a perfectly acceptable plan as well. I doubt ENVX will be back to 18 soon – more concrete progress is needed to get the stock out of the penalty box. Keeping at buy for now but taking this on a day-to-day basis. BUY

Inspire Therapy (INSP) is having a nice reaction today (was up over 10% early, now closer to 8% and above 200-day line) after destroying Q3 expectations and increasing full-year guidance by more than the beat. Third-quarter revenue was up 77% to $109.2 million (beating by $15 million) thanks to continued utilization improvements as a new CPT code and more efficient two-incision procedure roll out. Guidance for 2022 goes up by $28 million to $384 – $388 million.

Looking out into 2023, be prepared for a slower pace of growth in Q1, which is entirely normal. There may be some lift from more international business moving into next year. Also next year, Inspire should release the new Inspire 5 (assuming it’s approved later in 2023) and increase its addressable market by roughly 20% due to product/label improvement/expansion.

As with many of our stocks, I want to upgrade to buy, but we need a more supportive market. Until we get that (hint, hint Fed) Inspire remains at hold. HOLD

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.