Enovix: Leading Battery Technology Company In The Next Decade (NASDAQ:ENVX)

When thinking about the lithium ion batteries, innovation in the fast-growing space gets investors excited at the lucrative prospects. One exciting and promising innovation is the use of silicon anode lithium batteries, which is expected to bring performance benefits when compared to the traditional lithium ion batteries produced today. One company leading in this field is Enovix Corporation (NASDAQ:ENVX).

Investment thesis

I think that Enovix is promising as a leader in the space of silicon anode lithium ion batteries. My investment case for Enovix is as follows:

1. Enovix is able to overcome the key challenges faced by other silicon anode batteries and bring to the market a silicon anode lithium ion battery with superior performance in terms of energy density.
2. The company managed to obtain an initial order from a leading global consumer electronics company, which shows that large customers validate the battery technology and, in my view, this will likely bring future large opportunities to Enovix.
3. Enovix is also positioning itself for growth in Asia as it seeks to establish key distributors in the region and enable customized solutions to customers.
4. Enovix Mobility is taking the center stage as the company employs key personnel and results from its R&D program for electric vehicle applications start to take fruit.

Overview

Enovix is in the business of developing and producing lithium ion batteries that are considered the “next generation” technology. It is regarded as a leader in advanced silicon anode lithium ion batteries, and its unique and proprietary 3D cell architecture brings the benefits of silicon anode batteries and addresses the problems faced by typical silicon anode batteries. The company is currently a development stage company with no revenues generated yet. However, it will be producing its first product revenue in 2Q22 as it begins production in its first production factory in Fremont, California, named Fab-1.

Enovix started developing its unique battery technology in 2007, and for the first 5 years, spent time to develop the battery technology’s core processes and architecture. For the next 5 years from 2012 to 2017, the company began to work on its strategy and approach for manufacturing the battery. Since 2018, the company’s battery technology has been sampled by several customers that have validated the product performance.

With the company’s first production facility in the U.S. starting operations in 2Q22, this will be the first revenue from productions that Enovix has recorded since inception and a key milestone that shows the company’s ability to meet commercialization and production targets. Plans are being made for its second production facility as the company expects the procured equipment to be delivered to the Fab-2 site in 1H23. The company also expects Fab-2 to be its next generation manufacturing facility with benefits like requiring less space while having higher production output rates as the company learnt from its operations in Fab-1 so far.

Enovix claims that its advanced silicon anode lithium ion batteries are leading the current industry standard batteries by 5 years based on energy density. According to the company, its current battery technology is able to bring 24% to 133% higher energy density than what is available in batteries used in today’s consumer electronics products.

The primary market that Enovix is currently targeting is the mobile computing customers as well as the consumer electronics space, where the use of Enovix batteries can bring about a smaller and lighter product while extending the product’s battery life. Enovix has also interests in other markets where energy density can bring additional benefits to the markets of augmented reality, energy storage, and electric vehicles, although the company currently has no customers in these markets but is working with potential customers in these markets.

Solving the problems faced by silicon anodes

According to multiple scientific literature, silicon is one of the most promising anode materials as it can store twice as much as the usual graphite anodes used in Lithium ion batteries today. This means that theoretically, when included into a battery, silicon anodes increase battery capacity and energy density by almost 36%. However, there are several problems that exist that limit the current application of silicon anodes in today’s lithium ion batteries.

One of the problems of silicon anodes is formation expansion. The battery, when fully charged, can result in the silicon anode more than double in thickness, and this swelling can then result in physical damage to the battery. However, silicon anodes using Enovix’s 3D cell architecture as well as the company’s addition of its stainless steel constraint system, ensures that its silicon anode does not face the problems faced by conventional battery architecture. There are other problems like formation efficiency, cycle swelling and cycle life, that are addressed by Enovix through the use of its unique 3D architecture as well as other inventions and systems.

Enovix currently has a research and development program with the U.S. Department of Energy for the application of silicon anodes in electric vehicle applications. It seeks to achieve “energy density over 350 Wh/kg, cycle life greater than 1,000 cycles and 10-year calendar life using a 95%-plus active silicon anode.”

Initial order from a leading global consumer electronics company

Enovix announced earlier in May that it managed to achieve a key milestone when it got the thumbs up for a key technology validation milestone from one of the top consumer electronics companies in the world. This resulted in Enovix receiving an initial order for its high energy density smartwatch battery.

I am of the view that although this initial order from one of the top consumer electronics companies in the world is substantial and significant for Enovix, the more exciting opportunity comes from other markets and categories for this particular customer as well as other customers within the industry. This news might create the necessary awareness Enovix needs for other large companies to consider its battery technology.

Enovix shared that its battery was validated based on a wide range of criteria like energy density, cycle life, and temperature performance, amongst others. With this milestone reached with the customer, this enables the company to move on to the next stage of the customer’s commercial procurement process. With the initial order, Enovix has announced that these batteries for the customer will be produced at its Fab-1 factory in Fremont,

This also demonstrates Enovix’s ability to differentiate from the rest of the pack, as many of its other competitors are still in early stages with no orders outside of the laboratory. In my opinion, this not only validates Enovix’s technology and shows that customers see the value that Enovix’s battery technology brings, it also shows that Enovix is ahead of its competition which creates a first movers advantage that it can continue to leverage on in time to come. The next phase will be for management to demonstrate that Enovix has the necessary manufacturing capabilities to support and produce large orders for top global electronics companies in the world.

Pivoting for growth in Asia

Enovix recently made an announcement that it was adding several new distributors in Asia, as part of its efforts to support its future growth in the region and to benefit from the demand from OEMs in the region. The addition of these distributors will bring improved capabilities and expertise as well as valuable relationships needed to enter and expand in Asia.

One company named was Promate, which is a Taiwanese electronics distributor worth about $1 billion. Promate is expected to help Enovix with bringing to the table premium engineering support for its customers in Asia with the 120 sales engineers that Promate has around the globe.

Another company, Jetronic, which is a Chinese electronics distribution company that covers a wide range of market segments like consumer electronics and automotive. Jetronic is expected to help Enovix with several requirements for logistics given its IATA certification in chemical freight.

Lastly, Xiamen Holder Electronics is a Chinese electronics manufacturing company with a valuation of $2 billion. Enovix is likely interested to tap on the company’s strong relationships and connections within the Chinese market, specifically in the mobile electronics market.

As an extension of its U.S. market, Enovix is likely pivoting its Asia business for growth by enabling local support capabilities in these regions through these distributors announced, as well as its direct customer applications team. This localizing of technical capabilities is essential, in my view, to ensure that each of its customers unique requirements can be met and addressed in a customized way to ensure that customers are able to leverage Enovix’s leading battery solutions.

Building Enovix Mobility

Management gave an update on the Department of Energy program and having been almost at the halfway mark for the 3-year program that focuses on research and development efforts for the use of Enovix’s patented silicon anode technology for inclusion into the electric vehicle’s lithium-ion batteries. Management commented that the results from that program are “pretty stellar” as it advances its work into pairing Enovix’s silicon anodes with EV cathodes to maximize the use of Enovix’s unique architecture. I think that it is encouraging that the Department of Energy program seems to indicate strong value proposition as well as suitability and viability to incorporate Enovix’s technology into the electric vehicle’s lithium ion batteries to improve performance.

In addition, Enovix Mobility was launched and the company hired key management personnel to lead the mobility efforts. James Wilcox has been with Enovix since the early days in 2008 and will be leading the Enovix Mobility team. The company also hired Spencer Gore, with experience founding Impossible Aerospace, and has had experience as a battery engineer in Tesla (TSLA). He will be appointed as Head of EV products and, together with James Wilcox, they will be executing the company’s electric vehicles business strategy.

Furthermore, management suggests that they continue to see interest from electric vehicle players and thus, it could be a huge opportunity that opens up for Enovix when electric vehicle companies start to seriously consider incorporating Enovix’s battery technology into their electric vehicles.

In my view, it may be early days for Enovix in the electric vehicles market. However, it is positioning itself with the right people and right technology to bring disruption to the electric vehicle market by bringing a strong value proposition through its proprietary battery technology.

Valuation

To get a perspective into how Enovix looks like from the valuation viewpoint, the company currently is relatively early stage. I forecast revenues to grow from the current $7m in 2022 to $790m in 2025, which is a 226% CAGR over the period. At the same time, I expect Enovix to generate positive EPS in 2025, with a positive EPS of $0.60. Assuming a P/E of 50x on 2025F EPS and discounting back, my target price is $19.80, implying 90% upside from current levels.

Based on sales multiple perspective, Enovix currently trades at 18x 2023F EV/sales 3x 2024F EV/sales, while it is currently trading at 138x 2024F EV/EBITDA. While these may seem to show Enovix is traded at a premium, we need to take into account that Enovix is a leading silicon anode lithium ion battery player that, in my view, could see exponential growth in the next few years as it takes on large customer agreements, and that most of the capacity growth comes in 2023 and beyond.

Risks

Competition

Competition from companies developing emerging technologies and from other companies developing silicon anode applications may threaten Enovix. One particular silicon anode lithium ion battery competitor is Sila Nanotechnologies.

Execution risk

Enovix is a relatively new and development stage company that has yet to prove its capabilities in execution and ramping up scaled production. There is the risk that Enovix may face delays in ramping up schedules for its production facility which may cast doubts on the ability of the company to produce at scale.

Conclusion

Enovix looks set to be a leader in the development and production of silicon anode lithium ion batteries. Although it is still early days for the company, I think the small wins along the way prove the value proposition that Enovix brings to the customers. With the recent announcement about the initial order from a leading global consumer electronics company, I think this is the new beginning for Enovix in terms of gaining scale from orders from large companies.

In addition, the company is pivoting to Asia as it seeks to grow partnerships with distributors in the region and this sets the company well for growth in the region. Enovix is also building its mobility team to leverage the electric vehicle market and the R&D program with the U.S. Department of Energy is going well. My target price is $19.80, implying 90% upside from current levels.