ENVX - Enovix: Great Future But Road To Maturity Is Long

Summary

• Enovix has been in a downward trend since production delays were announced early last month.
• The company will produce 180,000 wearable-size cells at its Fab-1 Freemont, California production line in 2023.
• Revenue is trickling in with the company bringing in $1.1 million during its fourth quarter.
• This came with a quarterly operational cash burn of $21.8 million with cash and equivalents at $322 million.

I'm one of Enovix's ( ENVX ) common shareholders with confidence in my long-term position built on the back of the company's higher-density silicon-anode lithium-ion batteries set to power a new generation of consumer gadgets and eventually EVs at some point in the future. This is the simplified bull case with Enphase's ( ENPH ) T.J. Rodgers, Enovix's Chairman, also forming a smaller part of the wider bullish enthusiasm.

Bulls knew the risks they were taking with a pre-revenue tech company operating in a space radically being defined by a plethora of public companies and startups. The promise of higher-density lithium-ion batteries is vast and would act as a catalyst for numerous adjacent multi-billion dollar total addressable markets. For example, mobile phones that can hold more charge with less weight would all of a sudden be able to add new periphery technology to expand sales. Enovix currently has a number of battery cells targeting smartphones, laptops, wearables, and eyewear.

The company's negative 26% year-to-date returns should be expected as a natural part of the volatility inherent when investing in a company that reflects multiple layers of risk. There's risk around its technology stack potentially being surpassed by others being developed by companies like Amprius Technologies ( AMPX ) or Sila Nanotechnologies. There's also execution risk as highlighted by recent production delays. This is all aggregated with continued headwinds posed by rising funds rates to a revival of the type of animal spirits that drove commons to $30 highs. To be clear, the road ahead for Enovix is long and arduous and bulls should be ready for the volatile ride.

The Higher-Density Battery Opportunity

Enovix's recently reported earnings for its fiscal 2022 fourth quarter saw revenue come in at $1.1 million , a beat by $170,000 on consensus estimates. This was service revenue driven by custom cell shipments to the US Army and an unnamed mobile communications customer. Essentially, future customers will require bespoke battery cell dimensions to fit into the cavity in their gadget and the company expects custom cells to be a significant component of revenue from fiscal 2024.

The company recorded a net loss of $11.2 million, around -$0.27 per share driven by SG&A expenses of $15.4 million during the quarter. This was up sequentially from $13.1 million in the prior third quarter. With Enovix still in such an early stage of its commercialization journey, cash flows, planned capex, and liquidity all form the most important metrics. Enovix experienced a negative operational cash outflow of $21.8 million during the fourth quarter, a small increase from $20.6 million in the third quarter. This outflow was aggregated with capex of $4.8 million to place cash and equivalents at $322.9 million as of the end of the fourth quarter.

This will come against a planned fiscal 2023 capex of $120 million. The spending is necessary to develop Fab-2 in Southeast Asia and an automated R&D agility line to its Fremont facility. Operational cash spend in 2023 is expected to be in line with capex at $120 million to bring the total expected cash burn for the current fiscal year to $240 million, or around 74.3% of total liquidity remaining. Fab-2 is expected to come online sometime in 2024 and will have an output of around 9.5 million to 18.9 million units per Gen2 line based on cell size.

The Long Road Ahead

At the core of future adoption will be the company's BrakeFlow technology which allows its battery cells to be able to resist the type of damage that would cause thermal runaway to normal lithium-ion battery cells. This higher safety credential represents a moat for Enovix's patented technology. The company expects fiscal 2023 first quarter battery cell output to be 9,000 units with management planning for this to more than double every quarter of this year.

Critically, the recent fourth quarter underlies the promise held by the company's technology with a strong picture of the long-term growth potential being built by management during their earnings call. Enovix's technology has been validated by multiple customers with safety as a core aspect of its use case. Against a roadmap that could still very well be delayed, the 14.67% short interest is not entirely misplaced. This is fundamentally an investment steeped with risk and bears would highlight the $1.46 billion market cap for what's essentially a pre-revenue company as still quite buoyant.

However, the active design and design win portion of the company's revenue funnel now stands at $669 million, up sequentially by 58% from $423 million in the third quarter. Hence, the continued growth of this with a cash pile that looks set to last into 2024 represents a rebuttal to the bears. This is an investment based on risk and the potential returns could be significant as the company moves up its roadmap.

For further details see: