ENVX - Enovix: Investors' Concerns Justified (Rating Downgrade)

Summary

• T.J. Rodgers has faced a number of challenges in his efforts to turn the company around.
• Attempt at investor relations transparency - special presentation - misfired.
• Enovix has basic assembly line quality issues - therefore fixable.
• Vision is commendable, execution is questionable.

As the Executive Chairman of Enovix, ( ENVX ) T.J. Rodgers has faced a number of challenges in his efforts to turn the company around. He talked about these challenges in a special presentation on a January 3rd, 2023 webcast. ( Replay )

Following the special presentation, the stock ENVX price declined today by 41.01% closing at $7.15 per share and trading 37.9 million shares, compared to the 50 day average volume of 4.41 million shares and a float of 106.8 million shares, suggesting that investors were not convinced.

Sell ENVX

The last time I wrote about Enovix , it was in the wake of a significant decline in the stock price. At that time, I conducted a DCF analysis and arrived at a "buy" rating for the stock. However, today, I am issuing a "sell" rating.

While I do believe in the potential of Enovix's technology, the opportunity cost of holding onto the stock for the next two years is simply too high. While the expected return from ENVX may be substantial in the long term, I do not believe that Rodgers' current plan has a high probability of success in the near term. The inherent uncertainty in predicting probabilities and the need to weigh tradeoffs are fundamental aspects of life that are understood by only a few and appreciated by even fewer. The uncertainty is just too high in the case of Enovix at this time.

Challenges Faced By Enovix

• Incoming new CEO, COO
• Lack of clear and transparent investor communications
• Executive chairman TJ Rodgers leaving the executive role
• Decision to locate Fab 2 site in a foreign country, location unknown
• Investors questioning manufacturability of batteries
• Operational challenges and stagnant top line growth
• Inadequate company culture and attempt to instill a silicon mindset through appointment of "silicon" executives
• Delay in Gen 2 auto line production
• Need for cash infusion in 4Q:2023

The company just hired a new CEO, and COO a few months ago. Rodgers however announced his intention to leave the executive role in "Executive Chairman" in the near future. This may raise more concerns among investors about the leadership and direction of the company, particularly given the lack of clear and transparent investor communications from the company until now.

During the presentation, Rodgers seemed to take on the role of investor relations - IR - himself, but the company still needs an experienced IR person to build credibility and provide smooth transitions in leadership to continue investor relations transparency. The absence of an IR person at the presentation raised concerns about Rodgers' support for his staff in my opinion.

In addition to these issues, Enovix has struggled with stagnant top line growth, as the company had planned for revenues of $176 million in 2023, but will likely only maybe realize around $10 million. This has led investors to question the viability of the company's product, as they ask "show me the money" and seek proof that the batteries are "manufacturable". The company has also faced operational challenges, including the problem of the delay in the Gen2 auto line, as well as overall production ramp up, which has further eroded investor confidence

Table 1 displays the company's original projections for 2023 revenues, which were shared with investors. However, the company is now unable to provide any projections for 2023 at this time. This lack of clarity and transparency is likely to be a concern for investors and may contribute to the overall uncertainty surrounding the company's future prospects.

Another challenge facing Enovix is the decision to locate the Fab 2 production site in a foreign country, which has yet to be announced. This has raised questions among investors about the company's manufacturing capabilities, particularly given the problems with operational efficiency and the delays in the production of the Gen 2 auto line in Fab 1 in California.

However, the company's manufacturing process has been so inefficient that manual assembly has been necessary, and there is no proven track record of success in this area. The ramp up in production has been delayed 2-3 quarters.

The company has also struggled with a culture that is not conducive to success and has brought in "silicon" executives in an attempt to instill a silicon mindset.

Despite these challenges, Enovix does have some strengths that could help it succeed in the long term. The company has nearly enough cash for the three quarters, with $349 million in the bank, which should be sufficient to produce a significant number of batteries in Fab 1 and create the Gen 2 auto line - that is once the manufacturing, defects, yield problems, quality control issued are resolved and ramp up begins.

The new COO is already making a difference

It appears that Enovix has experienced quality control issues in its manufacturing processes, and the new COO, Ajay Marathe, who was appointed on November 10, 2022, is taking steps to address these issues.

In the special presentation, Marathe emphasized the importance of high yield, zero defect manufacturing processes and highlighted the need to balance high yield with low rejection rates in the manufacturing process, without compromising on design precision or tolerating quality problems.

To achieve these goals, Marathe plans to implement the Japanese 6S system, which stands for sort, set, shine, standardize, sustain, and safety. He also intends to improve relations with suppliers through incoming quality inspections and by keeping senior executives from suppliers on speed dial. Additionally, Marathe plans to eliminate hybrid work and bring everyone back into the office, as he believes that a manufacturing operation cannot be effective from home.

Marathe has already eliminated several layers of management, which should lead to improved communication both horizontally and up the chain of command, and increased awareness of ownership of tasks and projects. By implementing these changes, Marathe hopes to improve the efficiency and quality of Enovix's manufacturing processes.

Overhauling R&D

In order to improve efficiency and drive innovation, Enovix is overhauling its research and development processes. All R&D projects must now have a specified new technology plan and be on schedule, fully staffed, and working on new and next-generation technology. These projects must also have a timeline, resource needs, milestones or phases, return on investment, and must be integrated with awareness of what other projects are doing. Currently, the company has five new technology projects underway.

As part of this overhaul, every step in the process must have clear ownership and accountability, with owners assigned to rejected units and down machines. This machine-centric approach is focused on maintenance, engineering, operations, and real-time problem-solving, with an emphasis on full ownership, accountability, and transparency. By implementing these changes, Enovix hopes to improve operational efficiency and drive innovation.

As of today mentioned above, Enovix has $349 million in cash reserves, which should be sufficient to produce a significant number of batteries in Fab-1 and create the Gen-2 auto line. The company does not currently anticipate a need for additional funding in the next three quarters. This strong cash position is a positive aspect of the company's financial health and may provide some reassurance to investors.

It is also worth noting that Enovix is a budget-conscious company, with management opting not to fly first class and the company even underspending its budgeted capital expenditures. This may be due in part to the current culture at the company, which has accepted delays as a normal part of working with silicone, which requires precision and can be time-consuming. However, it seems that Rodgers is attempting to change this culture to one that is intolerant of delays and is focused on bringing new products and initiatives to market on time.

Vision

According to Executive chairman Rodgers, the vision for Enovix is to become a dominant company with a high market share and strong growth. The company does not want to be a small player in a large market, but rather aims to dominate the portable electronics market.

As part of this vision, Enovix is also looking to develop a second product in order to diversify beyond just batteries. This desire to be more than just a one-product company is likely driven by a recognition of the need to mitigate risk and increase the resilience of the business.

Table-2 displays Enovix’ market potential. It is a $13 billion market, and Enovix has $1.4 billion revenue funnel. The vision is commendable, execution is questionable, but the potential is there.

However, given the high probability of execution problems and the opportunity cost of holding the stock, it may be best for investors to sell ENVX at this time. The company's near-term prospects appear uncertain, and the possible expected long term return from ENVX may not justify the risk for investors. While Rodgers' vision for Enovix is certainly ambitious, the company must first address the numerous challenges it faces before it can hope to realize that vision.

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