ENVXW - Long Cast Advisers - Enovix: Pre-Revenue/Pre-Profit But With A Massive Addressable Market

Summary

• Enovix is pre-revenue / pre-profit but with a massive addressable market, so if it succeeds, the potential reward offsets the risks.
• ENVX is having a hard time designing, procuring and implementing the custom equipment to manufacture the batteries at scale.
• The key factor here is the probability of success.
• We’ve owned a small position, and I've grown the position.

The following segment was excerpted from this fund letter .

Enovix ( ENVX )

ENVX is what I'll endearingly call a "shitco" meaning it's pre-revenue / pre-profit but with a massive addressable market, so if it succeeds, the potential reward offsets the risks. I think there's room in the portfolio for a few smaller investments like this, but if I am consistently wrong over time, I'll change course ( SNES and SANW also fall into this category, and so far I’ve been wrong about those, but like ENVX, they are small positions with long time horizons).

ENVX makes lithium batteries using silicon instead of graphene as the anode. Silicon as an anod e offers many benefits - faster charging, longer charge periods and longer battery life – but it has a major drawback in that it swells when it charges, and this causes battery degradation and mechanical failure.

A handful of companies are trying to solve this problem and this past November, I had an opportunity to meet with and tour the factories of ENVX and its neighbor and competitor Amprius ( AMPX ). Both companies are over-represented with folks from the semiconductor industry, and both are trying to apply lessons from the chip industry with the hope of delivering Moore’s law type progress to a space that has been eking out only modest annual gains.

AMPX is addressing the problem using a chemical solution called "carbon nano tubes" and equipment more typically found in semiconductor production. ENVX's is a mechanical solution; instead of rolling or winding the batteries, the company stacks the anode and the cathode (more info here ) ,a different architecture that changes the direction of force, resolves the swelling issue and also improves safety. However, it requires completely custom designed equipment for production.

I’ve talked with folks who hired third party engineers to test the battery, and was relayed positive feedback. However, ENVX is having a hard time designing, procuring and implementing the custom equipment to manufacture the batteries at scale, which, needless to say, is essential to converting this from a science project to a business. As a result of the equipment issues, the company is behind on the initial plan it “sold to the street” when it raised money in a PIPE and SPAC, and this is why it sold off in Nov (when I initially bought shares) and in Jan (when I added to the still small position).

The company’s “special presentation” from 1/3/2 3 is the most comprehensive update on what they’ve done wrong to date, what they’re doing to get it right and when they expect this all to unfold. The compelling aspect here besides the potential addressable market is the company’s Executive Chairman, TJ Rodgers, and more specifically his foot, which is pretty far up the asses of the executives and management team at ENVX. On the company tour in Nov., I told him that as a shareholder, I appreciated that he had his foot up management’s asses, and he responded “on a scale of 1-to-10 in terms of how far up their asses my foot is, today it’s a four.” Recent changes in management provides some evidence that greater depths have been achieved.

Rodger’s foot has done wonders at prior companies where he’s owned shares and served on the Board, notably at Cypress Semiconductor, which he founded, and later SunPower ( SPWR ) and Enphase ( ENPH ). The situation at ENVX is a bit different than those other companies, because battery chemistry is complicated, and the industry is littered with failed tech that worked in a lab but not at scale. My impression - and the reason for our investment - is that if the problems are limited to a manufacturing one, then they are solvable and the company’s new timeline laid out in the 1/3/23 presentation is within our three-to-five-year horizon.

This brings me back to what I mentioned earlier re: the probability of success and the potential size for that success, which warrants a small position in ENVX despite it being pre-revenue. I don’t think it takes much to imagine that the size of the battery market is quite large and that a better technology with a widely available input could take some significant share. The key factor here is the probability of success, and it got me thinking about what inputs tilt the scales in our favor.

Particularly with smaller companies, I put management at the top of the list. I look for experience and prior history. I look for an ability to articulate and implement a reasonable plan that doesn’t change every quarter and compare it to how well they’ve done it in the past. I look to see if the CEO works with the same people from job to job or if they need to recreate a new management everywhere they go b/c no one actually wants to work with them, (a lesson learned from my investment in IVTY ). In the case of ENVX, Rodgers is known to be difficult, yet many executives have joined him from prior jobs, which I think speaks to their faith in his abilities to get this right. And I haven’t even touched on management’s more obvious role in driving the P&L, balancing the levers of investments in sales, R&D and overhead etc., which impacts growth and margins, and working capital, which drives cash flow.

At a close number two on my list of factors is the balance sheet. Cash provides the patience required to grow a business, the lack of it infers future dilution, and debt can be a dead-end street. In my nearly dozen years on the sell side, I never really thought about the balance sheet and only the rare client ever asked about it b/c equity investors tend to focus on growth and margins. But as a manager of OPM, it’s a no-brainer.

The dynamics of “what I look for” described above fits ENVX, which has cash to achieve its near term hurdles, also applies to our newer investment in RSSS, which has about $10M cash and operates at roughly breakeven as it invests in growth.

We’ve owned a small position simply on the change in management to a team I've invested with in the past (new CEO and CFO as of October 2021, which conforms with the company’s F2Q22 period), and I've grown the position as my comfort with their efforts have increased.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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