Description

Enovix: ENVX - Short:

$8.00/share

Disclaimer: Do your own work. I’m a random person on the internet - under no circumstance should you trust me. I may or may not have a position in Enovix and may benefit from its price movements. All investments have risk of loss. Do not taunt Happy Fun Ball.

Enovix is a short. 

Despite its lofty valuation, Enovix is a largely pre-revenue battery tech company that unequivocally admits things are going poorly. Even if it executes a turnaround and operations improve dramatically, the equity is worth a small fraction of today’s trading price.

Enovix is burning cash and does not yet have the necessary capital to reach operational scale. The initial steps toward that scale require building out at least four “Gen 2” production lines at a new plant somewhere in Southeast Asia (“Fab 2”). Paying for that will require a substantial equity raise. By management’s own account, its single “Gen 1” line in Fab 1 in California is not working correctly and will not be capable of high volume or profitable commercial production. 

The clock is ticking.

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In summary:

• The TAM is actually fairly small ($4 - $13 billion, not the $75 billion it previously claimed)

• Battery tech is a highly competitive industry: margins are thin and free cash flow is even thinner

• The company has raised ~$789 million lifetime-to-date but, in the words of its Chairman, “does not have the respect for capital that it should”

• Enovix is years behind schedule, massively over budget, and still does not generate any meaningful commercial revenue

• Its first plant (Fab 1) is now expected to operate at <0.5%(!) of its initial forecast

• Enovix is burning cash rapidly and needs more money to build out its second plant (Fab 2) with four “Gen 2” production lines somewhere in Southeast Asia. 

• To build that production capacity, Enovix needs to raise a lot more cash this year

• Its manufacturing process remains unproven and still does not work in an economically viable manner

• The founding CEO was just fired and replaced

• Enovix admits it “misled” investors and former employees “gamed” projections

• Even if everything goes well, the stock is massively overvalued

  • A winning competitor, Varta AG, has a smaller market cap than Enovix, despite Enovix being pre-commercial revenue. Among other things, Varta is Apple’s AirPod battery supplier. Practically speaking, Enovix cannot hope to do better than winning that type of market, yet it is already valued as if its business has succeeded.

• Enovix’s technology is not unusually novel and competition is coming fast

• Enovix is risking dilution that could decimate ENVX’s potential upside

There are so many issues with Enovix that it’s a bit hard to stitch into one elegant narrative. As a result, I’ve organized the remainder of this document as a choose-your-own-adventure by topic. I repeat various ideas in a few places, in case you choose a non-linear path.

This write-up will discuss the above in various categories:

• Background and Enovix History

• Raising More Capital

• Sell-Side Expectations

• What is Enovix Playing For?

• Hope, Hype, and the TAM Thesis

• Unit Economics

• Putting it All Together - Valuation

• Risks

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Background and Enovix History:

Enovix is developing a silicon lithium-ion battery - the use of a silicon anode (vs. a more common graphite anode) increases the stability and storage capacity of the battery.

It is a deSPAC - it came public amidst 2021’s SPAC mania. Brought public by its Chairman, TJ Rodgers, Enovix enticed the investment world with Rodgers’ genuine reputation as a winner. He lent credibility to Enovix’s goal of becoming a game-changing battery technology for consumer electronics (i.e., wearables, mobile devices, and laptops) and electric vehicles. 

Rodgers raised his own SPAC (Rodgers Silicon Valley Acquisition Corp.) and merged it with Enovix, lending his name and reputation to Enovix during the deSPAC process. As an angel investor in Enovix, Rodgers was on both sides of the transaction. Today, he owns roughly 14% of the company.

In 1982, TJ Rodgers founded Cypress Semiconductor, which was sold for $10 billion to Infineon in 2020. While Rodgers oversaw Cypress, both he and Cypress invested in and helped build other companies, such as SunPower (Ticker: SPWR). He also personally invested in Enphase Energy (ENPH), joining its board. Both Sunpower and Enphase are success stories. Rodgers is unquestionably a strong leader and executive. 

Back in 2012, Rodgers directed Cypress to invest in Enovix. By 2019, Enovix was struggling - he personally invested in an equity round that bridged to a late-2019 cramdown round by York Capital. In total, while private, Enovix raised hundreds of millions of dollars across at least seven different rounds. 

Today, a decade after Cypress’s first investment, Enovix remains largely pre-revenue. Coming public during 2021’s SPAC mania allowed it to raise an additional ~$460 million of cash (inclusive of SPAC Trust, PIPE, and cash from subsequent warrant exercises). It still needs much more cash. 

In 2022, even as the SPAC market came apart, ENVX stock held up. This past summer, its shares rocketed into the high-$20s as it emerged as a TAM-thesis retail darling, being pumped far and wide (including by a famous and outspoken short seller!).

Behind the scenes, things were not what they seemed. Its Q3 2022 November earnings release made this clear: Enovix disclosed manufacturing challenges and the stock fell dramatically, settling around ~$12. 

After the November carnage, Rodgers promised a January investor day to update on its progress. Four weeks ago (January 3rd), TJ Rodgers hosted the single most bizarre IR event I’ve ever witnessed - I encourage you to watch it on Enovix’s IR site. At the same time, he ousted the Founding CEO and named himself Executive Chairman (temporarily). He also disclosed that the board first considered replacing the now-removed CEO as far back as August 5th, given the operational problems the company was facing (this calls into question many of its prior and subsequent public disclosures).

The January event served as a full reset of the business: Rodgers updated owners on its current state (bad), its financial picture (bad), and its aspirations (smaller). Rodgers aggressively threw prior management under the bus - this is ironic, as Rodgers was and remains the Chairman. Among other things, during the reset, Rodgers:

• Deemphasized the electric vehicle opportunity 

• Admitted the old 30%+ EBITDA margin goal won’t happen

• Acknowledged prior management failed at developing efficient and scaled manufacturing capabilities

• Stated prior management “misled” shareholders (his word, albeit allegedly not deliberately)

• Noted costs are over budget and expansion projects are now a year behind the original schedule from the SPAC

• Disclosed Enovix is abandoning hopes of developing additional US-based manufacturing

• Shared that Enovix will need to raise substantial capital by Q4 of this year 

This slide from November is already so out of date as to be laughable.

On the plus side, Rodgers hired two ex-semiconductor executives with real operational backgrounds as the new CEO and COO. 

One might think Enovix would be a $1.00 stock by now, and the day following the reset, Enovix shares fell from $12 to about $6. They have since recovered to ~$8 (a $1.3 billion market cap). 

At $8, Enovix, which is effectively pre-revenue, remains more highly valued than super-successful lithium-ion battery company Varta AG, the primary battery supplier to Apple for AirPods. Varta has over $800 million of revenue and sports a $1.1 billion market cap (and $1.6 billion EV).

Even if Enovix succeeds with its reboot, I believe a reasonably bullish LONG thesis is for ENVX to be worth as much as $2.85 (or ~$520 million market cap, pro forma for dilution from the announced need to raise additional equity). Most other scenarios are worse than $2.85, including distress and bankruptcy.

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Capital Raise is Necessary:

“[Enovix] does not have the respect for capital that they should.”

• Chairman TJ Rodgers, January 3rd - discussing needed cultural change at Enovix

Enovix guided to start 2023 with ~$300 million of cash and is burning rapidly ($130-150 million of burn in 2022). With cash becoming more precious, Rodgers created a policy that ALL purchase orders now require his signature. In order to build its first real commercial production capacity, Rodgers indicated Enovix will raise capital by Q4 2023. He noted that, in the past, there had been some “gaming” of the internal plans by management. Going forward, that is a fireable offense. 

Enovix’s new plan is to have four Gen 2 production lines installed in a to-be-selected Fab 2 by the end of 2024. Each of those four lines costs $55 million for equipment and $15 million to install. The equipment for the first of those Gen 2 lines is already purchased and is being tested and optimized in Fremont (“Fab 1”), before being sent to Fab 2 late this year (once Fab 2’s location is selected and the line performance is optimized). That means Enovix needs:

+ $55mm per line x 3 lines 

+ $15mm per installation x 4 installations 

= $225 million for just incremental Production CapEx between now and the end of 2024. 

At the same time, Enovix is carrying substantial operating costs while it attempts to get to revenue scale. From an “EBITDA less Other CapEx” standpoint, Enovix is burning an additional $30 million per quarter. Over the next eight quarters, that’s another $240 million. In theory, Enovix will begin to generate some commercial revenue next year, so let’s call it $215 million of operating cash burn over 2023 and 2024. 

If things go roughly according to Rodgers’ plan, that adds up to $440 million of cash uses over the next two years. Enovix likely began 2023 with ~$300 million of cash, leaving it $140 million short.

To pay for this, I expect Enovix to attempt to raise at least another $200 million in equity ASAP. It has guided to a capital raise by Q4 of this year.

Enovix cannot afford to wait: its “cash burn + manufacturing CapEx” will increasingly be a Sword of Damocles. Waiting until the last-minute desperation makes no sense: having just kitchen-sinked its shortcomings and still sporting an overvalued stock price, Enovix should attempt to raise capital as soon as possible. 

If it is able to pull off a $200 million raise at $8/share, it will issue 25 million shares - obviously many scenarios are more dilutive. In addition to its 157 million outstanding today, 25 million more would put it at ~182 million pro forma.

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Sell-side Expectations:

Knowing a capital raise is coming, the sell-side remains (willfully?) delusional. Or, perhaps, willing to delude. For example, one day after the reset, which initially sent the stock down 50% to $6, one firm published an $18 price target (lowered from $19, see below). FWIW, I’m not knocking that specific firm - $18 is the most conservative price target on The Street. All other analysts are >= $20 with one as high as $100.

Happily for Enovix, the same sell-side firm models it issuing stock in 2024 and 2025 at >$17 and >$18/share, respectively (and somehow raising $25 million in 2023, with no dilution). [See the red boxes below for Shares Outstanding and Cash Flow from Financing - keep in mind the latest filing has 157 million basic shares outstanding.] This analyst’s approach of magic capital raising limits dilution to “only” 10 million shares. If we instead assume ENVX raises $200 million at $8, dilution is 25 million shares (or more, if it needs to raise >$200 million, as the analyst forecasts).

The same sell-side analyst models the next three years as follows (highlights are mine).

To understand the magnitude of the miss so far, here is a snippet from the Enovix PIPE presentation at the time of deSPAC’ing. Note: the original revenue plan is impossible given Enovix’s near-total lack of production capacity.

Despite the new numbers being dramatically lower, they still represent a rosy scenario - Enovix has near-zero commercial revenue today and no major contracts. Today, the sell-side has Enovix cresting $200 million in Revenue in three years (2025 - upper green box), but at 26% Gross Margins (purple box), and still losing a fortune on Operating Income (lower green box). Note its SPAC presentation presented $800+ million of revenue with 52% gross margins and nearly 40% EBITDA margins! 

During the reset, Rodgers decimated hope for 40% EBITDA margins, indicating even 20% margins would be exceptionally good execution. When asked if he still was willing to standby the projections from the SPAC, Rodgers replied:

I’ve been concerned about eventual profitability for a long time… Eventually, you only make your way in the world if you make something cheaper such that you make a good gross margin, pay for your R&D to move to the next thing, and still put something on the bottom line. My feeling about profit is - if it ever gets to be 20% - and if I’m still on the board - I’m going to ask, ‘why aren’t you investing?’…So, to me, 20%…anybody claiming more than 20% profit just hasn’t been out there yet…[To forecast a future margin,] we don’t have the data yet. That data will come from unit economics where you take a machine…a Gen 2 machine, and you look at how much it costs…that’s why it’s gonna be in a low-cost area. I want a high-speed machine that also gets run by people who earn two bucks an hour. That’s what you gotta have to be competitive. And we will look at those unit economics. We haven’t gotten there in our plan yet, so we don’t have a good plan for you yet, but I do believe this company can be quite profitable with automated equipment in a low-cost area [geography] in the electronics segment, the $13 billion portable electronics segment of the market. Don’t have an answer today.” [emphasis added]

Read that again. Set aside the fact Rodgers has been Chairman of this business the whole time - he said Enovix still DOES NOT KNOW if it will be able to earn an acceptable margin. The manufacturing does not work today, they do not know how effective it will be when it does work, and they don’t have hard orders from customers yet. Yet the sell-side believes the company will have an industry-leading margin.

Enovix’s manufacturing process is different from other battery players - in order to provide more density and safety, Enovix “stacks” its cells into a battery whereas most players “roll” their cells. This is exactly what it sounds like. There is a fabulous Tegus call about another silicon anode player (Amprius: AMPX) where a former from Enovix talks about the technical difficulties of scaling its process. A relevant clip:

…you need to stack hundreds of those at very tight tolerances… So imagine we have a strip and we put another strip on top of it and another strip on it. So if you look from the side, they all have to be very, very, very straight, one to each other. And what we found in the lab that the cells that had the higher capacity, the difference - or the delta - between the one that was sticking out the most of the strip to the one that was the most inside was 10 microns. And I panicked. When I worked at Apple, we were doing crazy things. But I had literally infinity resources in China, and I had infinity budget. It's completely different. I said, ‘Can I do it 20 microns, at least?’ I know it sounds a lot, but I said, ‘I need some margin here.’ [Because, at] 10 microns, the equipment will be so slow and so expensive that there will never be an ROI on it. And his words to me were, ‘if you tell me that you need 20 microns,’ this was his words to me. He said, ‘you are killing me because then we lose a lot of our advantage.’ 

So when the equipment started to arrive…I'm wrong a lot, but I just have a lot of experience. And when I say a lot of experience, it means I made a lot of mistakes, but also at Apple what we used to do when such complicated equipment comes in. First of all, I told my team this one, it's very slow. I don't care about the speed - let's make one good cell. I want to see that the equipment, first of all, is capable. And then you start speeding up the equipment. 

So we had a lot of issues bringing up the equipment, speeding it up. We were never able - when I left. And of course, they will keep improving. But the problem is, like you rightfully asked, so when I was at Enovix, the numbers were, and I assume there are still close, to make money, they need to make 45 million cells per year. So, to make 45 million cells a year, you need a lot of equipment. It's a huge investment, and it's very complicated equipment. I don't blame the [former] CEO because really, he's a super honest guy. But of course, he was under huge pressure, and I was in some of the meetings from the investors. 

And we will say, ‘the equipment is costing this amount,’ and every time when I say how much the equipment will cost, they were all upset at me and wanted to kick me out of the room. But then they say, ‘Well, but we will buy a lot of equipment, and it will be cheaper.’ But it's a little bit like a chicken and an egg. In order to buy a lot of equipment, you need a lot of money, and you need a lot of customers. (Emphasis added)

Back to the current situation: in the sell-side model above, the sell-side analyst above has Enovix spending $300 million on CapEx over the coming three years and cumulative pre-tax losses of another $300 million. It likely ended 2022 with a bit over $300 million of cash. One could easily argue Enovix needs to raise more than the $200 million I assume - it certainly will need to by 2025.

Per Rodgers’ own admission, the existing Gen 1 line doesn’t work and requires manual support to run, leading to it operating at wholly non-economic <10% of nameplate capacity. Enovix is working hard to upgrade and improve that for Gen 2.

The Gen 2 lines have capacity of 9.5 million units per year, if operated at 80% of capacity (which is strong performance). On four lines, that puts it at ~38 million units per year by mid-2025. 38 million units x $7.50 per unit = $285 million of revenue, once ramped (mid-2025). Enovix will still be subscale, but if Mr. Market gave it credit for someday achieving a normalized EBITDA margins of 15%+, it would earn $43 million in normalized EBITDA. To support its cost structure, Enovix must continue to expand beyond the four lines (the former employee above estimated 45 million units per year just to break even) - that also requires Enovix to raise even more cash.

If two and a half years from now, we give Enovix credit for 10x that normalized EBITDA margin, it’s worth $430 million or $2.36/share. At that point, it will have raised nearly $1 billion in equity since inception and likely will still be burning cash. Rounding up, I believe $2.50 is a very generous valuation, yet sell-side puts Enovix at 8-10x more valuable than me.

What drives the difference? The analyst above uses an EV/Sales multiple of 8-12x to justify their valuation. Read that again. Enovix aspires to be a capital intensive, low-margin, operationally rigorous, massively competitive business with powerful customers. In the meantime, it is flailing and has a desperate need for capital to execute its new plan and avoid bankruptcy. It is not a sales multiple business. 

To drive this point home, look at my orange box in the PIPE presentation slide above: that is the economic profile Enovix provided for competitor battery companies. Given Enovix’s challenges, there is ZERO reason to believe that Enovix can exceed that; there are MANY reasons to believe it will struggle to achieve anything near the high-end of the range. Even if, many years from now, Enovix hits the high-end of that range, it is unlikely to ever justify today’s valuation as it will require much more scale, which means much more capital raised (i.e., dilution).

Supplying batteries to consumer electronics giants is a highly competitive industry. Enovix has positioned its tech as game-changing. While it may be a logical step forward in battery tech, it is not an order of magnitude better (or even twice as good). Its claimed advantage is closer to 20-30% (with its edge strongest in the smallest devices - small devices have lower ASPs for Enovix). Battery tech already improves ~5% per year. If Enovix comes to market in 2025, its edge would be even smaller by then. 

To give a sense of the competitive landscape, see this chart on industry capacity and planned expansion from a recent sell-side report. Note: this doesn’t explicitly include high-end competition like Varta or Amprius. Industry-wide lithium-Ion battery production capacity is set to nearly triple over the coming few years.

Rodgers stated during the reset, that Enovix will be building out its second fab (Fab 2) in late 2023 and intends to install its first Gen 2 production line in Q4 2023. Enovix will ramp its capacity build in 2024 as it installs approximately one line per quarter in Fab 2 in 2024 (more on this below). As Enovix builds out Fab 2 with its first four lines, “that’s the first time we’re going to need money, because those three new lines will be a hundred fifty million bucks.”

[Later disclosures put the cash need closer to $55 million per Gen 2 line + $15 million to install, or $225 million dollars. Note that the first Gen 2 line’s equipment is already paid for, as Enovix is working on getting it functional to spec in the Fremont R&D and engineering facility (Fab 1), before shipping to wherever Fab 2 will be located.]

If you were Rodgers and you believed you MUST raise capital by year-end 2023 what would you do? Your stock is currently trading at a valuation that implies home run success - when would you raise the equity?

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What is Enovix playing for?

TJ Rodgers noted that for most wearable or hand-held high-end consumer electronics devices, the ASP/battery revenue per device is $5 to $10. For larger items, like laptops, the revenue might be $25 (but use a lot more manufacturing capacity). While Enovix will initially be pursuing smaller devices (like wearables) with battery revenue on the lower end ($4-5), if we assume the first four lines can generate $7.50/device and hit an upside case of 38 million unit sales/year, it could theoretically generate close to $285 million of revenue. 

Let’s put $285 million into context: that would make Enovix two-thirds as large as Varta’s lithium-ion business, which, among other things, supplies Apple’s AirPods(!). 

Varta guided to $350-375 million in lithium-ion microbattery revenue in 2022. Obviously being the battery supplier for a product like AirPods is a mega home run outcome. Estimates vary, but 60-90 million sets of AirPods are sold per year. The same Varta segment also supplies microbatteries to Samsung and other wireless headphones manufacturers. Varta’s controlling owner has referenced a $5 ASP, which implies 70-75 million battery units sold (I’m assuming it’s really two micro batteries at $2.50 each per pair of headphones).

Becoming two-thirds as large as Varta’s lithium-ion business in three years seems unlikely. But even if Enovix can sell that unit volume, can it command a premium margin?

Keep in mind Enovix promotes a power gain of 20-30% vs current lithium-ion competition. Per the same former referenced above:

…who needs those cells? So 20% [improvement] is very nice. But, for example, I left Apple, and I was pretty influential at Apple. So I went to talk to the Apple team, and I said, ‘are you even interested?” They said, ‘you know, we will never buy from a company like Enovix because [we] can't commit [our] business on a company like Enovix because [we] need super-high volume.’ That's one thing.

Apple makes a lot of money, but they care about every cent. So if I will tell Apple, ‘instead of 50 hours, you need to pay more to get a battery that is 60 hours,’ it doesn't make much sense. They are not going to go for it. People who were interested when I was at Enovix was, for example, Motorola, who is making those walkie-talkies for firefighters. And they have a battery life of 30 minutes, as far as I remember.

So when a firefighter goes into the fire, maybe another five minutes can save somebody's life because [in that situation] money doesn't matter because it's - I don't know what's the right word - the security or safety issue. I would think maybe a military application can work, but you need a customer that will buy such high volume, and it will be very difficult for them to find it.

Likewise, Rodgers acknowledged that 20% EBITDA margins are a stretch goal. As the sell-side report above shows, due to large fixed costs and depreciation, Enovix may be fortunate to generate 20%+ gross margins until it reaches several hundred million of sales. If we give Enovix credit for 15%+ normalized EBITDA margins, as a fairly successful supplier into device giants, three years from now, Enovix could optimistically generate $43 million of capital-intensive EBITDA on $285 million in revenue.

At an undiscounted 10x EBITDA, that would be worth $430 million. Assuming zero net debt and 182 million s/o, that $430 million equates to $2.36/share. At 12x, it’s closer to $2.84.

In my opinion, $2.84 represents quite strong execution. While I can come up with more bullish scenarios, most realistic outcomes are well below $2.84/share.

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Hope, Hype, and the TAM Thesis:

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

• Warren Buffett

TJ Rodgers has a well-earned reputation as a real operator and business builder. However, Enovix also has an unbroken track record of overpromising and underdelivering. Missing milestones is nothing new to the company. The below was created by York Capital in 2019 as it was leading a new private investment round. I think it’s safe to say Enovix has missed…

Beginning in 2012, first via Cypress and then personally in 2019, Rodgers invested in Enovix and backed its founder Harold Rust. Rust was CEO from the founding until about one month ago, when Rodgers ousted and replaced him.

Rodgers raised his own SPAC (Rodgers Silicon Valley Acquisition Corp.) and used it to merge with Enovix, lending his name and reputation to Enovix during the deSPAC process. Retail lapped it up, led by certain prominent and loud voices. It positioned itself as a game-changing battery tech company with huge potential to win in the $75 billion global battery TAM. These two slides are quite recent, from its November 2022 investor deck. The TAM bar graph slide is identical to a slide in the SPAC merger announcement deck two years ago:

Note that Enovix included EVs within its TAM. This is critical - EV demand makes up over 80% of the expected 2025 lithium-ion battery market. 

Lest you think, “hey, Compound248, that slide doesn’t really imply EVs were a big part of Enovix’s pitch,” see the below slide from its SPAC presentation.

Moving on…

In his reset presentation earlier in January, Rodgers admitted that Enovix has largely put electric vehicle battery work to the side, saying, “the technology for making EV cells - the methodology - is different… We have a separate division on EV - it’s small but gaining traction, and we can’t really afford, right now, a lot more than that… [it’s a] five-person team.” 

In my opinion, EV revenue, if Enovix ever generates it, is outside any reasonable forecast window and will require massive investment. It cannot afford to focus resources on EV for the foreseeable future. It’s also worth noting that Enovix’s battery design weighs more than alternatives, which is particularly problematic in EVs where the weight-to-energy tradeoff is critical.

Likewise, Rodgers noted that mass-market mobile communications (e.g., smart phones) and laptops are a bit farther down the road - the initial commercial effort will be on winning a piece of wearables revenue (e.g., WHOOP band, watches, VR glasses, etc.). At the reset presentation, an analyst observed the discussion was, “...very heavy on the wearables side, maybe less on the mobile handset side than I was expecting. [Are there handset] designs in queue?”

Enovix said yes, but acknowledged that mobile and laptops are farther behind - the initial focus is on wearables. Rodgers noted that Enovix’s energy density advantage is greater in wearables (very small batteries) than in mobile or laptops (somewhat larger batteries).

That new focus shrinks the initial TAM to <$4 billion, expanding to $13 billion over the medium term. In essence, TJ Rodgers just admitted that the real TAM (the “SAM,” if you will…I hate myself) is only 5% to 15% of previous assertions. Rodgers eviscerated the hope cycle.

When it was deSPAC’ing, Enovix positioned itself as basically the only silicon-anode lithium-ion battery player (“five years” ahead of anyone else). Retail still frequently makes this claim. It simply is not true. In Rodgers’ own words: “What we’re doing now, and what you’re seeing, is how hard it is to bring to market…That’s the barrier separating us from the other guys right now - everybody’s got some plan for silicon; we’re shipping it and that’s what’s going to differentiate us.” {emphasis added)

The narrative has moved from (paraphrasing) “Enovix is the only silicon-anode battery player” to “everyone is a silicon-anode battery player, but we’re trying hard to be first.” Maybe, but that sounds like a competitive market where sustaining high margins and high returns will be very hard. 

With this shift in narrative, TJ Rodgers has doubled down on Enovix’s “BrakeFlow” technology. I’m not going to go deeply into it here, but its BrakeFlow system is designed to limit batteries overheating and combustion. Rodgers says that Enovix will use BrakeFlow to create an “Intel Inside” style branding and demand. Setting aside the fact Enovix cannot manufacture BrakeFlow in its current Gen 1 or Gen 2 designs, there are ZERO consumer electronics companies that are going to promote the brand of the battery hidden in their device. Apple and Samsung (and Tesla) do not want the customer to care about component manufacturers - those companies go out of their way to hide those from the consumer and regularly multisource to limit supplier power. Further, nobody in their right mind is going to advertise, “our device is less likely to overheat and catch fire.” That introduces a worry into the consumer that, today, most consumers do not worry about. Might there be some military or first-responder applications where this matters? Yes. Is it going to be a consumer brand? No.

Apple and Samsung go out of their way to kneecap suppliers on the regular. Apple just did it in screens a few weeks ago:

…and Samsung did it to its own chaebol’s battery unit in 2017. These guys don’t play.

While we are putting the nail in the hope coffin, allow me a brief aside. In the reset, TJ Rodgers praised Enovix Board member Dan McCranie multiple times. He called out McCranie, a former Cypress board member and executive, as value-add - someone who has helped companies with turnarounds many times. 

Two weeks later, on January 17th, Enovix disclosed McCrainie had resigned from its board, effective January 20th.

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Unit Economics:

Rodgers was extremely clear in his reset:

“You can calculate the revenue from four [Gen 2] lines - I gave you enough data to calculate it. I deliberately did not calculate it for you. Because, frankly, as the guy who ran the SPAC, I feel that’s one of the problems with SPACs - I feel SPACs put in too much money, too early. On the company side, there’s a rush of capital that causes a lack of respect for capital…”

Well, calculating it is what we did above: 38 million units at a TBD Fab 2 at $7.50 per unit is $285 million in revenue. Gross margins are likely to be depressed during the ramp, while Enovix remains deeply subscale. Enovix current cost structure burns ~$30mm per Q - if we assume that can stay flat, it would take >40% gross margins just for Enovix to break even on $285 million of revenue. That provides no maintenance CapEx or expansion in its team to support a $285 million business.

Above, I showed that Enovix’s ultimate margins are likely to be much lower than indicated in its SPAC merger announcement. One of the key drivers of this is the disastrous “performance” of Enovix’s Fab 1 (its only current manufacturing facility), which is in Fremont, California. (Enovix used to enjoy pointing out that Fab 1 is directly across the street from Tesla, implying something special…)

If we give Enovix credit for 15% Fab 2 EBITDA contribution margins, on 38 million units at $7.50/unit, Fab 2 (excluding Fab 1) will generate $285mm of revenue and $43mm of contribution EBITDA. Approximately half of that will go to maintenance CapEx, leaving ~$22 million of pre-corporate, pre-tax cash flow. Fab 2 will cost ~$280 million for four Gen 2 lines ($55 x 4 + $15 x 4), leaving an 8% ROC, if we don’t charge for taxes, R&D, or corporate costs and assume generous margins. 

Given a cost of capital that’s well into the double digits, it’s not obvious Enovix has a business model even theoretically creates value. If it did, it still likely would not be worth today’s price. This is a hard business. Let’s dig further into it:

When Enovix announced the SPAC merger, Fab 1 was expected to ramp to $220 million of revenue by 2025 (see image above).

During the January reset, TJ Rodgers stated the following:

“Fab 1 must become economically important. Not necessarily profitable. [It is] a small fab in Fremont, California. It has to be economically important - I define that as a million or more in revenue and I want a customer to disclose that our batteries enable the product.”

So Fab 1 has gone from a $220 million revenue capacity site to “a million or more.” Whoops!

Quoting Rodgers again: 

“Line 1 [in Fab 1] is a Fremont wearables line (meaning it makes small batteries)... but it’s nonfunctional from an automation point of view. That means its rated capacity of 550 UPH [units per hour] is really more like 100 and, obviously, that wreaks havoc with output and promises. Line 1 is going to make 180,000 full production revenue quality units in 2023. There will be a mixture of…wearable cells that sell for 5-bucks - and the bigger cell phone batteries that sell for 10-bucks.”

And that, Dear Reader, helps explain Enovix’s new, dramatically lower, margin profile.

To achieve its newly lowered margin goals, Enovix recognizes its hope to build in the USA will not work: “we bounced around between Utah and Arizona and Texas… we couldn’t find a way to make batteries in the United States and make a company that had 20% profit.”

Rodgers went on to say the quiet part out loud, stating plainly about going to Asia (epic quote - click here if you want to watch this amazing statement):

“I want a high-speed [manufacturing] machine that also gets run by people who make two-bucks an hour.”

Achieving reasonable profitability is not simply a cost structure challenge; it is a know-how challenge. Fab 1 (including the aforementioned Line 1 and a half-built Line 2) is built on Enovix’s “Gen 1” manufacturing process. Fab 1 and Gen 1 are not working in an economically viable manner. 

Rodgers emphasized this point:

“When Gen 2 turns on, Line 2 will be obsoleted. We will pull the plug… [Fab 2] is going to be life or death. And it better work right and it better have high yield and make a lot of batteries… Gen 1 is not working the way we want it to…and Gen 2 can’t have any of those problems.” (emphasis added)

The new reset goal is to have the first Gen 2 line delivered to Fab 2 and installed by November 2023 (in ten months) and put three additional Gen 2 lines in by Q4 2024. Enovix intends to announce the location of Fab 2 in a “Southeast Asian country” by July of this year.

Immediately prior to the Q3 report, the sell-side had Enovix Fab 1 revenue ramping to $140+ million by 2025 and Fab 2 at ~$170 million. In 2025, a hypothetical Fab 3 would also theoretically begin producing and Fab 4 would be under construction (possibly as a JV) for a 2026 launch. Most analysts had R&D and SG&A flat beginning in 2024, which would allow Enovix to finally achieve operating profitability in 2026 or 2027. Today, that seems unlikely. Enovix needs to simultaneously cut its burn AND spend to grow. It’s living on the knife’s edge. 

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Putting it All Together - Valuation:

“We’ve got all the money we need to get through 2023. If we want to get a line per quarter in 2024… we will need to raise money. It will be something around the fourth quarter of 2023. If we are raising money, it will be because we need machines. If we need machines, it’s because our batteries are a hit and we need to make more of them.” (emphasis added)

If you believe Enovix waits until Q4 to raise, being long brings with it dangerous negative reflexivity: anytime the price goes down, the risk of future dilution goes up, which could drive the price further down, and so on and so forth. 

On the other hand, under the vast majority of scenarios, Enovix's current stock price is already tremendously overvalued. So, while one could argue there is a symmetrical positive reflexivity, the gravitational pull of fundamental value is down.

From a game theoretic perspective, NOW is the time for Enovix to raise. It has an overvalued currency and has fully admitted its sins.

Scenario 1 - Win on All Four Gen 2 Lines:

Varta’s microbattery EBITDA margins are around 20%, before any charge for corporate overhead. I struggle to see how Enovix can out-earn an aspirational competitor.

Enovix is going to struggle to earn a meaningful margin. This is a scale business and it is coming from zero with a bad track record of operational failures. I gave basic math above that implies ~$2.85/share is an optimistic case (38 million units x $7.50-8.00/unit x 15% EBITDA margins x 12x EBITDA valuation on 182 million s/o).

Scenario 2 - What is Implied in the Current Price?:

What if we reverse engineer it: what needs to happen for $8 to be fair value?

To skip ahead, there is some circularity here: with four Gen 2 lines, Enovix won’t have enough capacity to generate enough revenue to justify an $8 share price. It basically will need nine lines (five additional). If we give Enovix credit for efficiency enhancements, those five lines will cost an additional $300 million. If it can finance half of that, it will need $150mm of equity. At $8/share, it would issue another 19 million shares.

$8 x (182 + 19) million pro forma shares = $1.6 billion PF market cap

Things would be going well, so we’ll assume 14x EBITDA (undiscounted)

$1608 / 14 = $115 million of needed EBITDA. 

If things are going swimmingly, and Enovix can earn 20% EBITDA margins, $115 million of EBITDA implies $575 million of revenue. At an ASP of $7.50/unit, that implies shipping 77 million units (eight to nine Gen 2 lines).

Perhaps Enovix could achieve that run-rate by the end of 2026 (four years from now). And if it accomplishes that, it would then be worth…$8.

Scenario 3 - Recreate All of Varta but at a Higher Multiple:

Varta also has other lines of business (including traditional batteries). In 2022, Varta will do approximately $800 million in TOTAL sales and earn a 20% EBITDA margin. 

After Enovix’s first nine lines, let’s assume all incremental CapEx was funded without issuing equity. If Enovix can match Varta’s $800 million in sales, it will do $160 million in EBITDA. In a downside case (for our short), if Varta cum ENVX trades at 15x, its EV would be 15 x $160 = $2.4 billion. On 201 million shares, that’s ~$12.00 per share. I don’t think that is at all likely, but it implies a manageable risk for today’s short-seller.

While I have been giving Enovix credit for execution and valuing it on an EBITDA basis, it’s worth noting that Varta spent 20s percent of revenue on CapEx each of the four years from 2018 to 2021. In 2022, Varta faced a demand slowdown and input cost increases, leading to slashed guidance - its overall margins compressed from the 20s to Bloomberg forecast for 2023 of 12%. Alongside that, it is cutting CapEx and putting expansion on hold, yet sell-side still expects 13% CapEx/Revenue in 2022 and 2023, leaving precious little free cash flow. These are tough businesses - I do not believe anything like 15x EBITDA makes sense.

The implication of the above is that a) these businesses are subject to booms and busts; and b) they aren’t highly free cash flow generative (little to no EBITDA converting to free cash flow).

Enovix is operating on a knife’s edge and needs to win a parlay bet to even be worth a fraction of today’s value. It must:

1. Fix production

2. Win large customer contracts

3. Scale production

4. Raise equity capital without insane dilution

5. Avoid being a one-hit wonder on its product (if it even gets one hit)

6. Earn attractive margins

7. Be assigned a high valuation multiple.

Enovix needs to hit all seven of these to simply avoid near-complete decimation.

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Risks:

• Enovix is pursuing a legitimate next-gen battery technology. If it succeeds and can scale reasonably capital efficiently, perhaps it can build success on top of success, driving fundamental upside

• The stock has previously mooned and could moon again. A huge move up on hype, hope or - gasp! - reality is not out of the question

• It finds a financing partner, such as Samsung, that is willing to provide highly attractive non-dilutive capital

• A strategic buyer, such as Samsung or Tesla, becomes enamored with the tech and decides to pay for its exclusive use

• EVs!

• TJ Rodgers is a winner - shorts are betting he doesn’t crush it

• Shorting is a dangerous activity. Stay safe out there.

Catalyst

Equity raise in 2023. As the stock price falls, it becomes more and more dilutive.