ENVX - Enovix: Breakthroughs In Both Silicon Anode Battery Technology And Its Business

2023-11-09 11:38:51 ET

Summary

• Enovix is a battery technology company that creates enhanced lithium-ion batteries with a smaller, lighter silicon anode and a proprietary 3D silicon cell structure.
• The company has a strong buy rating due to its unique positioning in the market, its focus on the small battery segment, and the execution from its management team.
• Enovix faces execution and investment risks, including potential obstacles in technology commercialization and funding vulnerabilities.

With the rapid advancement in renewable energy and decarbonization technology, who would not want a battery with high energy capacity, rapid charging, extended lifespan, and low-cost production? But as many things in life, there is no perfect solution – although companies are tirelessly searching for one, from “improving lithium-ion batteries” to “replacing lithium-ion batteries”.

Following my recent analysis of QuantumScape, I have decided to zoom out and delve into the future and innovation of lithium-ion battery. As such, this article centers on Enovix ( ENVX ), a battery technology company which creates enhanced lithium-ion battery with a smaller, lighter silicon anode and a proprietary 3D silicon cell structure.

Disruptive Innovation Sustainability Score (“DISS”) – The concept of a new analysis framework going forward

Before delving into the analysis of ENVX, I would like to introduce a new analytical framework that I will follow to analyze most of the disruptive technology companies in the future, since I have noticed that many of the disruptive technology companies that I cover in the decarbonization and space tech domains share some similarities – they propose advanced solutions under R&D, raise substantial funds, and expect stable revenue within 3 to 5 years.

As such, feeling the need to establish a systematic analysis method, I present the concept of "DISS rating" for assessing companies' sustainability in terms of broader business and technological sustainability, beyond the environmental and social impacts.

In this article, I will not go deep into the meticulous methodology but rather invite you, my readers, to join me in developing this methodology together along the way in my future analysis. Please share your thoughts in the comments below.

In my previous analysis, I touched on my thought process when evaluating breakthrough technology companies, focusing on three parameters as shown in above graph:

• Problem intricacy and market sizing : No one wants to spend years burning cash and developing a solution without people needing or willing to pay for. A company must target a significant problem with a substantial market demand, such as overcoming battery technology bottlenecks or innovating fast-charging for electric vehicles, rather than niche areas like car entertainment.
• Technical feasibility : Both "absolute" feasibility in terms of science and engineering design and "relative" feasibility concerning comparative advantage with other solutions are crucial. For example, if solid-state batteries prove more efficient than silicon anode batteries in the context of battery technology, ENVX's investment thesis may weaken.
• Company survivability : Critical, especially during economic downturns. Disruptive tech companies are often pre-profit and even pre-revenue, making effective cash management and survival strategies essential. The timing of additional fundraising activities is also critical.

Due to the length of this analysis, details of each parameter and the weighting of my scoring system will be developed and discussed in each of my future analysis. Now, let's dive into our subject today: Enovix.

Investment thesis

Analyzing battery technology within the provided framework reveals its immense potential because of the global shift towards electrification and the rising demand for electric vehicles and renewable energy, necessitating substantial energy storage solutions. Enovix has positioned itself as a key player in this arena by focusing on a novel type of lithium-ion battery utilizing silicon as an anode, along with an innovative internal battery structure, both contributing to increased energy density. Notably, Enovix stands out by targeting the small battery segment, such as wearables, and is poised for significant commercial production scale-up.

Overall, I would give the company a strong buy rating, given its unique positioning in tech and market, as well as the execution from its management team.

What is ENVX doing?

A perfect battery demands the highest energy-to-weight ratio and the fastest charging time with minimal damage per charge cycle. As such, two notable breakthroughs have surfaced: the solid-state battery, substituting liquid electrolyte with a safer and denser solid electrolyte, and the silicon anode battery, utilizing a metal capable of storing more lithium ions than traditional anode materials.

While most lithium batteries use graphite anodes, Enovix uses silicon anodes . The superiority of silicon over graphite lies in its ability to hold four lithium ions with just one silicon atom, making it three times more powerful.

Despite silicon's cost-effectiveness and abundant availability, it is not without problems. The anode undergoes significant expansion, over two times its size, during the initial charge. The subsequent expansion and contraction cycle can lead to electrical disconnection or even cracking of silicon particles.

While this is the trickiest problem for all companies who want to develop silicon anode battery, Tesla included, ENVX claims that they have overcome this by its proprietary 3D silicon cell architecture as opposed to the conventional jelly roll structure.

Assessing from both the “problem intricacy” and “technical feasibility”, ENVX has scored high in the two areas based on its approach to the problem and the unique technology breakthrough. Most importantly, the company is smart to first enter the small battery market instead of the EV market which requires a lot more mature solution.

Company survivability – based on Q3 earnings announcement

Revenue Outlook :

• Vertical-first strategy, focusing on high-volume customers for scalability
• Strong demand from multiple smartphone and laptop OEMs
• Revenue expected to increase sequentially to between $3 million and $4 million
• High-volume production expected in 2024 to generate stable revenue

Cash Burn and Financial Health :

• Continue to exert tight control in OpEx, alongside with CapEx saving measures including the transformation of Fab1 facility
• Cost savings from RouteJade expected from 2025 and beyond
• Cost reduction efforts ongoing, aiming for a $50 million range per production line

I believe investors unmistakably perceive Enovix as a startup, tempering their revenue and profitability expectations, aspects I think were deliberately sidestepped in the earnings call. However, the company strategically redirected the narrative, focusing on a paramount concern for investors—high-volume battery production. The company has therefore jumped 14% following the announcement.

Valuation

To provide a comprehensive valuation, I've opted for the "Football Field" technique, encompassing various valuation methods to determine a fair value through blended weighting. However, for ENVX, the Discounted Cash Flow method has been excluded. This decision stems from the company's early-stage status, making the DCF model heavily reliant on assumptions.

In constructing the blended ratio forecast, we employed EV/Sales and EV/EBITDA multiples of approximately 4x and 15x, respectively, to the sales and EBITDA projections for FY2028, considering a 5-year timeframe. After taking into account other valuation measures such as analyst target , the potential debt and discounting back to the current year, the estimated 1-year target price stands at $21. These applied multiples align with industry averages and comparable companies in the battery or clean tech arena such as Bloom Energy, Amprius Technology, and others. These companies share similar characteristics and development trajectories, especially being pre-profit.

Investment risks

Despite the optimistic outlook, Enovix, operating in a phase of stable revenue and intensive R&D, confronts some execution and investment risks::

• High Execution Risks : Enovix faces substantial execution risks, potentially falling short of targets and milestones. The planned technology commercialization might encounter obstacles, impacting the envisaged market expansion into EV products.
• Capital Intensive Nature : Being capital-intensive, Enovix necessitates continuous investment in R&D. While revenue growth is projected, the company remains distant from achieving profitability and generating free cash flow.
• Funding Vulnerabilities : In the current economic landscape, where Enovix is actively investing in technology and production facilities, the company is susceptible to funding risks. The ongoing cash burn during development could pose challenges in fundraising efforts.

Investment comments

In conclusion, Enovix has garnered a favorable rating within my proprietary evaluation framework. Positioned as a crucial player in addressing the bottleneck in various markets, including small appliances, EV, and broader energy storage, the company has demonstrated progress with its technology, albeit in the early production phase. The company exhibits manageable financial health with anticipated improvements.

These indicators collectively suggest Enovix as a compelling investment opportunity, with a target price set at $21.

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