Enovix: Poised To Gain Clout In The Smartphone Battery Space (NASDAQ:ENVX)

da-kukIntroduction Enovix Corporation (NASDAQ:ENVX), a small-cap stock focused on developing disruptive battery technology, hasn’t had the greatest of years in 2024 so far; at a time when other industrials have generated positive gains of +8% on average, and the prime benchmark has done even better, with positive gains in the low teens, ENVX has lost around -9% this year. YChartsDespite this phase of underperformance, we still think ENVX could be an intriguing prospect, as it has the potential to emerge as a key cog in the smartphone battery universe. The Smartphone Opportunity ENVX is involved in the competitive environment of designing and manufacturing lithium-ion batteries, where incumbents have been on a relentless quest to ensure higher energy density and capacity without compromising on safety. Currently, most lithium-ion batteries on the market are not well placed to facilitate this because their anodes are largely graphite-based, typically with a very small quantity of silicon (5-7%). In contrast, the disruptive architecture adopted by ENVX utilizes silicon anodes, which on paper, has the capacity to store over 2x the lithium per unit volume than graphite anodes, thus putting it in a better position to provide more density and capacity. May 2024 Investor PresentationNote that there have been attempts by the competition to also raise the level of silicon on their anodes, but their architecture hasn’t been adroit enough to handle the innate swelling and cracking problems associated with silicon that ENVX’s architecture has managed to keep a lid on. ENVX’s prowess in this arena is likely to be keenly leveraged by smartphone OEMs who have had to cope with ever-increasing battery sizes over time, which is certainly not ideal when you’re looking to add more competitive functionalities to bolster your value proposition. In addition to that, recently we’ve seen a spurt in Gen AI-based applications which will only necessitate the need for even more energy-dense batteries with a capacity of over 6000mAh (milliamp hours). May 2024 Investor PresentationAll this bodes very well for Enovix which is currently in the process of providing samples of its high-density EX-1M battery to potential smartphone customers (EX-1M reportedly offers over 18% capacity advantage over conventional cells, and the next-gen EX-2M battery whose samples will go out by Q4 will offer even better capacity advantage) with the intention of commencing high-volume production from FY25. Note that at the start of May, ENVX had also entered into a battery development agreement with one of the top-5 players of the smartphone OEM market, which only provides further validation of its technology. May 2024 Investor PresentationSpeaking of other top smartphone OEMs, ENVX intends to double down on its sampling efforts (which will start from Q2) with 6 of the top 8 players (the top 8 are believed to control 80% of total smartphone volumes). If these big players sign up for ENVX’s battery tech expertise, it could be a game-changing moment, as collectively, this entire cohort produces over 280 different models of smartphones and sells on average 3.5m units within each model. If ENVX can get its foot in the door with even 3-4 models of these top players, that could lead to huge business volumes. Look at how consensus is currently positioned on the topline; essentially we could be looking at topline CAGR of 227% from levels seen last year till the end of FY25. May 2024 Investor PresentationTo prepare for a potential surge in high volume, ENVX has also made some cost adjustments, by converting its Freemont facility to an R&D center, and moving its entire production line to low-cost Asia (this will result in fixed costs dropping quite significantly). ENVX also completed the acquisition of a battery tech firm in Kore (Routejade) last year, which also has two useful electrode coating lines, resulting in some vertical integration, potentially higher cost savings, and better manufacturing yields. Risks ENVX’s revenue profile will likely diversify over time, but driven by the acquisition of the Korean-based battery manufacturer- Routejade last year, the company’s overall revenue mix now tilts heavily to the military terrain with one single military subcontractor contributing three-fourths of the company’s revenue last year. Military contracts are also typically not very flexible, and some of ENVX’s military contracts include unlimited damage provisions and if, for some reason, things go sour, there’s potential for substantial liabilities, here. When ENVX announces results next, investors shouldn’t be over-enthusiastic, as Q2 is typically its weakest quarter; group revenue already saw a sequential decline in Q1 of 28%, and consensus revenue estimates for Q2 ($3.75m) point to another sequential decline of 29%. ENVX is currently not profitable, (not even at the gross profit line on a GAAP basis), and management has suggested that the pace of COGS and OPEX will only expand this year as the company incurs additional expenditure ahead of the commercial ramp-up. This loss-making situation is not likely to reverse any time soon, and sell-side estimates suggest that investors may need to wait until FY28 to see a positive figure at the EPS level! Closing Thoughts- Technical Picture A bird’s eye view of Enovix’s weekly price imprints over the past three years, would point to something very similar to a falling wedge pattern. Essentially what we have is contracting resistance over time, with the potential of a breakout, as the range gets tighter. InvestingMomentum traders would be enthused by the price movements of late and would likely be preparing for a breakout from the upper boundary of the wedge, but we would’ve preferred to have bought into this counter after the strong green candle in late April, when there was some consolidation before a move higher. In early May, the risk-reward proposition within the wedge looked quite fair, but as things stand, the stock is hardly a breath away from its upper boundary. There’s been some history with the stock flirting with the upper boundary. In July 2023, the stock threatened to break out from the boundary, but the candles then all had long wicks reflecting buyers’ fatigue. We may not necessarily see a repeat of the same, but for the sake of prudence, you want to be buying the stock when it is closer to the lower boundary of the wedge, and not when it is so close to the upper boundary, where you may have to deal with a false breakout. Separately also note that the stock’s recent strength since April has also done nothing to deter the courage of the bears, with the short float metric now at record highs of 36.5%. YChartsFinally, we would also choose to tame our enthusiasm for ENVX stock, because it no longer looks like one of the beaten-down opportunities in the battery tech space that could’ve benefitted from mean-reversion interest. Quite unlike the situation a few months ago, ENVX’s current relative strength ratio versus other options is now around 20% higher than its long-term average which only dampens the long case. YCharts To conclude, we like ENVX’s potential, but we are not sufficiently convinced that this is the most ideal entry point to buy the stock; we’ll go with a HOLD rating for now.

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