From Vision to Reality: Revisiting Enovix (ENVX) and the Journey to Scale
I (@SLMacro) first wrote about Enovix back in mid-2022. In that article I introduced the technology and discussed why I thought they had a chance to disrupt the battery industry. I won’t go into too much detail on the technology, as I already previously discussed it. The article can be referenced here:
Since that article, much has changed both within the company as well as with the stock price. The company has gone from a quiet speculative battery company to becoming one of the most controversial companies (and stocks) on social media. The two loudest crowds on Twitter have been going all out against each other, though most of the time lacking any true insight into Enovix. One camp thinks the company is well on their way to revolutionizing the industry. In the other camp are short sellers and skeptics who are calling the company a pump and dump as well as fraud. They are adamant that Enovix won’t be successful and that company leaders and prominent social media personas are in cahoots to pump the company and have retail investors serve as exit liquidity.
I have no problem with people being skeptical about Enovix’s ability to scale battery production. It is a valid concern. What I am confident of though is that the company is neither a pump and dump nor a fraud. I do believe there is a contingent of short sellers who are trapped, and they are trying to drive the price down. I believe recent milestones, including their Army contract, give validation to the technology and what Enovix is trying to accomplish. Given all the recent chatter, I thought now would be a good time to review how the company has changed in the past year, what they have accomplished, what they are trying to accomplish, and what the bear thesis is. I will also discuss how I have managed my risk in this volatile speculative company over the past year.
Leadership Turnover
In December 2022 we saw the co-founder and CEO, Harrold, Rust ousted by executive chair T.J. Rogers (ENVX’s largest shareholder), after the company failed to scale up production and meet deadlines. Raj Talluri was appointed the new CEO. Shortly after this change, on Jan 3, 2023, T.J. Rogers held a special presentation where he openly discussed the issues he saw facing Enovix. He discussed the failures that Enovix encountered in their Fab1 plant in Fremont. While the honesty was appreciated, the presentation saw the stock price drop from $12.12 on 1/3/23 to an intraday low of $6.50 on 1/4/23. Since then, the new CEO Raj Talluri and the rest of the Enovix team has met and exceed numerous milestones they set. As they have executed, the stock price of ENVX has also been in a steady uptrend. In my opinion, the current leadership is much improved. T.J. Rogers, and the team he has helped install, have experience both with growing companies and with bringing products to scale. I think it is important to understand the background of the current leadership to understand that the team in place is top notch.
T.J. Rogers
T.J. Rogers is a billionaire scientist and entrepreneur with vast knowledge in the field of energy. He is the founder of Cypress Semiconductor. After he stepped down as CEO, he successfully fought a proxy fight against the company, arguing that the directors had a conflict of interest with state-sponsored competition. I believe this shows he will fight for a company he believes in and that he stands for ethical business practices. In 2017 he invested $5 million into Enphase Energy. The company was near bankruptcy before he stepped in. At the end of 2017, the stock (ENPH) was worth $2.39. After T.J. took a position, we saw the company finally begin to execute and since then, the stock has grown by leaps and bounds. It joined the S&P 500 in 2020 and the stock price rose as high as $339.92 and currently sits at $154.33. The market cap is over $20B dollars. He was an early investor in ENVX and within the past year added to his shares on the open market. As of May 2023, he owned over 21.4 million shares and is the largest shareholder. A 75-year-old billionaire with close to half a billion dollar position, while remaining very active on the board is nothing to sneeze at IMO. It shows the level of conviction he has in Enovix’s ability to execute on their goal of mass-producing silicone anode batteries.
Raj Talluri
Raj Talluri joined the board in January 2023 after it became clear Harold Rust was ill equipped to scale Enovix. Prior to coming to Enovix, Raj was the vice president and general manager of the mobile business unit at Micron. That unit was responsible for over $2B in operating profits in 2022. Before Micron, he was a senior vice president and general manager at Qualcomm. He was responsible for the IoT business and grew it from infancy into over $1B in revenue. Raj has proven his ability to scale products and has extensive experience specifically in the portable electronics space.
Ajay Marathe
Ajay joined Enovix in November 2022 as the COO. Prior to coming to Enovix, he was a senior vice president of global operations for Western Digital. He also served in the past as COO of Lumileds, a private company affiliated with Apollo Global. Ajay was in a leadership position with AMD prior to this. He has over 38 years of experience overseeing operations and manufacturing.
Samira Naraghi
Samira Naraghi is the VP of product management and joined the Enovix team in March 2023. Prior to this she was the global head of partnerships for Meta Connectivity. There have been rumors that Enovix is in talks with Meta about supplying a battery for VR. While this has not been confirmed, I would not be surprised if there was a connection, given Samira’s prior history. Before joining Meta, she led the go-to -market strategy and business development at Amazon Web Services’ cloud computing platforms. She has also held leadership roles with Atheros Communications, Qualcomm, Rambus, and IDT.
Dave Cech
Dave is one of the newest additions to the Enovix team, joining in June 2023 as VP of sales. Prior to joining, he served as senior director of sales at Qualcomm. He has extensive experience in managing sales teams and in creating partnerships with other companies/customers. Raj Telluri specifically brought over Dave given their history at Qualcomm. Dave has created relationships with many large cap companies, and this could serve as a great advantage for Enovix as they scale their business. He will be able to lean on those relationships to help drive future sales agreements and partnerships.
Milestones and Progress
Since the ousting of Harold Rust, it seems that Enovix has been moving at breakneck speed. They have consistently met milestones and recently were able to secure funding to help with their Gen2 facility in Malaysia.
Product Progress
In June, Enovix received a purchase order to produce battery cells for the US Army. Details revealed that this was a $600,000 purchase order. Before this purchase order, ENVX cells were tested extensively and validated by the army. The plan is to put the cells in prototypes with hopes to grow the partnership to “multiple tens of millions of dollars in years to come.” With regards to battery production, Enovix had set a goal of 18,000-unit sales in Q2, and exceeded this number before the end of the quarter, producing 22,502 batteries on the quarter. They had also set a goal for 36,000 units in Q3 and 180,000 batteries for the year. There does seem to be a question if Enovix will still target the 180,000-cell yearly goal. The company expects the agility line to be functioning by November, which will help capacity at the Fremont plant. That said, Enovix alluded to potentially pivoting away from the 180,000 goal to concentrate on larger capacity cells for their army contract and on higher value laptop batteries. There has been a rumor that Dell is an interested party for the Enovix battery and this may be driving any potential pivot. This relationship has not been confirmed by Enovix. What was confirmed though was that Enovix secured engagements with Vivo, Xiaomi, and Lenovo. Vivo and Xiaomi are in the top 5 global OEMs and Lenovo is number 3 in the US. Typically companies to not allow the release of their names until supply can be realized so in my opinion this is big news.
What’s Next? Agility line and Fab-2
A recent huge win for Enovix was the signing of an agreement with YBS to secure $70 million in financing for the Fab-2 factory in Malaysia. This was a huge win as it is non-dilutive and will decrease capex in 2023 and into 2024. Let’s first look at the agility line. This is the next line in the R&D factory located in Fab-1 in Fremont. It will enable quick changeover and the ability to accommodate various battery sizes. It will allow Enovix to increase the speed of battery customization which in tern will help speed up the customer qualification process. In the most recent Q2 earnings call, Enovix noted that they are in the process of moving customers from early sampling to a new stage where they will be sampling 1,000 units or more. The Fab-1 site will ramp up with the agility line up by end of year and will be used to continue to qualify new customers until the Fab-2 lines are in place. The plan is for the Fab-2 site in Malaysia to have 4 lines, but initially the agility line and line 1 of Gen2 will be built. Line 1 in Gen 2 will have the ability to produce 9 million larger batteries per year or 18 million smaller batteries. This line will be a universal line with future lines potentially being customized for customers. After the agility line and Line 1 of Gen2 is up, we should have more color on the expected ramp up to 4 total lines and expected output.
Bull Case
Get autoline up and running this year on schedule.
Avoid delays in Gen2 Line 1.
Continue validation with companies, especially large-cap companies.
Once Line 1 in Gen 2 functional, sign an agreement with a large-cap company and release their name.
Validate with multiple companies and become the go to supplier for portable electronics that have higher energy requirements.
Potential buyout by a large-cap customer or partnership deals with multiple customers for dedicated supply lines/ facilities.
Expand applications to larger batteries and continue R&D specifically for EVs.
What we do know is that #1-3 are already underway. Currently the Fremont site is more of a test/R&D site so I would not expect a large cap name to be released (#4) until Gen2 is functional and Enovix can show their ability to mass produce. In the most recent Q2 earnings call, Ajay did a walkthrough of the manufacturing equipment for Gen2. The equipment is ready. Ajay showed how it will have the ability to allow Enovix to quickly adjust to different cell types in order to match customer needs. As stated earlier, the first line will be a generic line able to produce 18 million small cells or 9 million large cells. I would not be surprised if capacity is increased even further for future lines, which may become dedicated lines for specific battery types based on customer needs. Once Line 1 validates ability to scale, I do expect shoes to drop quickly. I believe multiple companies are waiting for this before they sign concrete agreements and customer names are released. There have been rumors Meta (VR glasses) and Dell (laptops) are in talks with Enovix, and previously the company noted they were in talks with 3 greater than $200B market cap companies. Interest is there. With regards to #5, in the most recent earnings call, Raj Talluri discussed AI and how energy dependent it is. He discussed the need to eventually move AI off the cloud and directly onto devices in order to reduce cloud costs, increase speed and efficiency, increase accessibility (use when no internet), and improve security and privacy. The issue though with moving AI on-device is it significantly increases demands on the GPU, CPU, and memory. Some applications are 30x (or more) energy intensive. There is not currently a cell on the market that will be able to service these high demand applications without rapidly draining battery life. A better battery is a necessity, and the bull case is that Enovix is the supplier of this. I encourage people to read a recent blog Raj wrote on this:
Getting to #6, Enovix already appears to be laying the groundwork for potential partnerships or even future buyouts. India recently announced a multi-billion dollar proposal for production-linked subsidies to companies that set-up battery cell manufacturing facilities in India. Coincidently, or maybe not, Enovix just announced plans to develop a new R&D and manufacturing facility in Hyderabad India, which just so happens to be the “AI capital of India.” Microsoft, Google, Amazon, Qualcomm, Salesforce, Nvidia, and Oracle all have a presence in Hyderabad. Just this past week, Meta signed an agreement to help develop India’s AI ecosystem as well. Reading the tea leaves, it would seem Enovix is establishing a presence in India to be close to many of the large-cap companies working on AI applications, which will require higher energy capacity for portable electronics. Enovix knows their technology will be needed and appears to be skating to where the puck is going.
I think over the next year catalysts #1, #2, #3 will be successful. I would not be surprised to also see #4 happen, and a large-cap customer name to be released. If this happens, I expect #5 and #6 to also fall into place in the coming years. Once the company is able to scale and find customers, the next step will be expanding their footprint and also bringing an EV battery to marketplace. If they are successful with #7, and able to demonstrate an EV battery that provides longer ranges, be recharged more times, and is more stable.. they will be able to own the EV battery market. I can envision a $20B+ market cap company if Enovix is able to execute on their goals.
Bear Case
Excluding the bears who think that Enovix is a fraud, their argument is essentially 3 things.
Enovix won’t be able to scale the technology.
Enovix is overvalued compared to other battery producers that have a 1-2x sales multiple.
Entering the market as a new player will be difficult.
In my opinion, argument 1 is a valid concern. It is a concern I share. Scaling and executing is hard. I remain encouraged that since leadership has changed, the company has met and exceeded milestones, and this is in the face of not having an automated process, which will be in place in the near future. Point 2 is comical to me. I have heard bears argue that even if Enovix can scale, they will not be able to demand a premium on their batteries. This is rubbish. Build a better mouse trap and you will be able to charge more. This is typically the case for any product but will be even more so with Enovix. Portable products that are energy intensive, such as those deploying intrinsic AI, will not be able to come to market without higher capacity batteries. Furthermore, trying to give a valuation based on sales in a new company is silly. Lastly, point 3 seems to have already been proven incorrect based on the number of companies trying to qualify Enovix batteries. The demand has already presented itself. If Enovix can execute, I do not think they will have difficulty finding customers and eating market share from other major players. As they say, the cream rises to the top.
Ultimately any bear case I have heard has not been supported with any facts. Furthermore, the main bear voices I have heard (or read) have zero technical knowledge about battery production. I would give more weight to discussions if they were backed up by experts in the field or at least any tangible information. The people who say “it is only a battery company” remind me of those who continuously said "Tesla is just a car company.” Battery technology has not changed in decades. Trust me, if the technology is disrupted, the disrupter will demand a premium.
Risk Management
As I mentioned last year, ENVX is a speculative pre-revenue company and as such it is high risk and high reward. I first wrote about Enovix 7/17/22 and the price of ENVX was $9.93. At the time I noted, while it was a highly speculative company, it was a buy in the $7-11 range. This proved to be correct.
Between August and September 2022, we saw the stock price rise as high as $26.30. We then saw it fall to $6.50 on 1/4/23 after the special presentation from T.J. Since then, the company has rebounded and is in an uptrend, with recent highs set on 7/27/23. The company has been on quite a ride but is significantly up from the range I previously mentioned last year. I stated at the time that the company was a 3-5 year hold for myself but as the stock has gone up, I have been risk-managing it to my comfort level. I initially took some profits on ENVX back when it went between $23-25 in 2022. My position was quite large, and this allowed me to lock in profits and let my core position ride “risk free.” Then 1/4/23 happened and the stock dumped. I actually thought T.J. Rogers’ special presentation was great. It allowed the company to get any bad news out and level set. As such, I could not resist and bought the dip in size, with both shares and later with 2025 LEAPS. As the stock bounced from that bottom, my position relative to my overall portfolio grew quite large. I locked some profits on 3/31/23 and subsequently again on 6/30/23. Both sales proved to be premature (stock kept going up), but they did help me realize profits and feel more comfortable with my position. Another avenue, possibly a better one, I could have taken would have been to sell options to protect my positions. At this point my position remains large and is de-risked quite significantly. I do not have any plans to lock profits again until/unless we see a strong breakout from the $23-25 level. If we do, I may consider locking in some more profits wherever that breakout stops. Ultimately though, this is a long term hold for me should the story remain intact.
Conclusion
The proposition is quite straight-forward to me. If Enovix can scale, the stock will 5-10x even from current levels. And if the company cannot scale, it will be a penny stock. Will Enovix be successful? I do not know the answer to this, but I obviously believe they will, given my continued investment in the company. We may be in for more wild rides over the next 1-2 years. If Enovix announces a major customer, we could see the stock explode 30%+ in 1 day. Similarly, if they announce Gen2 ahead of schedule we could see the stock take off quickly. Conversely, there could be several reasons we may also see a selloff in the stock. This could range from a general market downturn should we head into a recession (where nonprofitable growth companies are often punished), to short attack (currently the stock is around 25% short), to delays in getting Fab2 up and running in Malaysia. Should any of these happen, especially Fab-2 delay, I would not be surprised if the stock price is punished. If that happens, I will not panic, and instead may add to my current position. Ultimately, if a setback doesn’t impact my belief that the technology is scalable, it will be nothing more than short-term noise to me. Now if the data changes and I see red flags, I will have no problem cutting my position. Like Drukenmiller though, I like an asymmetric risk/reward profile, and I think ENVX presents that. I see a company that is upgrading leadership, hitting milestone after milestone, and executing as expected. I see a company that has the potential to disrupt the battery space and ultimately a company to make me a lot of money. The next few years are likely to be exciting, nerve-racking, and hopefully very profitable… and I plan to be along for the ride.
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