Enovix (ENVX) Manufacturing Update. And Thoughts on Yesterday.
The broad market was taken down a notch yesterday, supposedly because job openings increased in August. I’m not buying it.
We’ll get average hourly earnings for September on Friday, which will probably show wage inflation continues to ease and the labor market isn’t as tight as yesterday’s market reaction implies.
I’m far from an expert here, but I think the real reason the market is so weak likely has more to do with supply-demand dynamics in the Treasury market (lots of supply = higher yields), which at this point might have more to do with the federal budget deficit than the Fed’s “threat” to hike by another 25bps in November, then to only cut rates by 50bps in 2024.
Think about it. Since September 15 the 10-year yield has soared from 4.3% to 4.8%. That’s a big, rapid move (50bps, less than three weeks). The Federal Reserve’s latest projection for its own target interest rate for the next three years shows a decline from a range of 4.4% - 6.1% (2024) to 2.4% - 4.9% (2026), then a longer run target of 2.4% - 3.8%.
A 10-year Treasury yield of 4.8% (and racing toward 5%) is out of whack with those projections and points toward other dynamics in the market.
Anyway ... enough about that and back to the topic at hand.
Enovix (ENVX) fell 12% yesterday (was down more intraday) after announcing a shift in strategy for its Fremont, CA manufacturing facility, AKA “Fab1.” This facility has been ramping up production, doubling about every quarter, as per management’s guidance from a few quarters ago. This quarter it was supposed to make 36K cells. It was never intended to be a high-volume, low-cost facility.
Management just announced that it pulled the plug at 24K cells in Q3, all of which are for the U.S. Army program (about $200K in revenue in Q3), is letting go of the roughly 185 workers (about 125 contractors), will take $2.5 million in restructuring charges in Q3 and will accelerate depreciation for Fab1 equipment to the tune of $36 million over the next two quarters.
The reason given is to use this facility as an R&D center to support custom battery cell design for a few large-volume customers (i.e., smartphone manufacturers) that will need a lot of batteries in 2025 and beyond, instead of commodity-type, standard-cell battery manufacturing for whoever wants to place an order.
This has very short-term financial and employment implications. The aforementioned workers will be let go, annualized savings will be around $22 million and revenue projections (short-term, and small) will take a hit.
However, this strategic shift makes sense. The Fab1 plant isn’t the future of this company. It could only ever get Enovix to an inconsequential scale. The manufacturing strategy in Asia is to produce millions of batteries, something Fremont would never, ever do. It makes more sense to have a dedicated R&D center in CA and crank up the volume where it costs a heck of a lot less.
Having said that, it’s always annoying to be told one thing, then have that change. It’s unlikely that Enovix management never considered this potential back when they provided the guidance for Fab1. Yes, there has been a new management team come in so there’s some wiggle room there. But still, it raises questions of transparency, which in my mind is the main reason for ENVX stock to have taken a hit yesterday. Though, a horrible market certainly didn’t help.
In any event, this doesn’t change anything in my eyes. R&D happens in CA, production overseas. Focus on the big customers. Make custom, high-value cells rather than commodity-type, low-cost batteries. Leave room to work on EV batteries. That was the future last week, and that’s still the future today.
Considering moving ENVX back to buy given
