Enovix: Setting Up For Long-Term Commercial Success

Summary

• Enovix's 3Q23 results show good progress on key milestones as the company transitions to scaled volume production.
• The company's vertical first strategy focuses on key large customers to drive scaled and efficient production.
• Enovix's EX2 technology has been well received by customers, and the company plans to launch smartphones in 2025 and scale into multiple models.
• The Gen2 autoline looks on track to complete factory acceptance testing by January 2024, and this will be followed by site acceptance testing and the start of sample production in April 2024.
• Enovix continues to show that it has a strong demand, a great management team, and a product with a solid value proposition.

Just_Super

Today, I will be reviewing Enovix's (NASDAQ:ENVX) 3Q23 results.

For a company like Enovix, the focus from an investment angle is less on the quarterly financials given that the company is transitioning to scaled volume production, but more on the execution of the team and the progress that they are making.

For Enovix's 3Q23 quarter, the company has continued to execute well on its strategy and saw good progress on the key milestones as we slowly approach 2024.

I have covered Enovix extensively, which can be found here.

Vertical first strategy

I like that Enovix is choosing to focus on a vertical strategy, which is similar to the approaches that many tech hardware companies take.

With the vertical strategy, Enovix is then focusing on a handful of key customers that can help to accelerate revenue growth and drive the scale needed for higher profitability.

The management team at Enovix knows the importance of a vertical strategy given that in any industry, the bulk of the industry's volume is concentrated in the largest 6 to 12 customers.

In the smartphone world, the majority of the volumes are concentrated in five to seven smartphone customers, in the PC world, just a few PC OEMs make up the majority of volumes, and we see a similar pattern in other markets as well.

By focusing and being successful in the vertical strategy, this would require being able to meet the high-volume needs of these large customers and with this high-volume production and a more focused product portfolio, this can drive operational efficiency and lower operating expenses for the company.

Disciplined approach to scaling up to high-volume production

While Enovix has a sizable revenue funnel and very strong demand, the team has a disciplined approach to scaling up to high volume production.

CEO Raj Talluri spent some time elaborating on its EX2 technology. Thus far, management commented that its EX2 technology has been very well received by customers thus far as a result of its 30% increase in energy density from the baseline and 1,000 cycles in fast charge.

With this level of interest, Enovix plans to ship samples in 2024 to customers and ramp to millions of units in Malaysia through the year.

Where will the focus be?

Talluri and his team have strong connections with these large customers through their experience in the industry. Smartphones, in particular, looks to be low hanging fruit for the team given all their experience in the industry. As a result, Enovix will start from smartphones, and then to PCs and with the acquisition of Routejade, also sell into the IoT and wearables markets.

Management is confident that with their EX2 type technology, they will be able to launch smartphones in 2025 and scale into multiple models of smartphones then, moving into PCs in 2026.

As a result of the confidence of being able to scale into volume production, management expects that with strong demand from smartphones and PCs, there is a solid path to profitability.

While EV batteries are more of a distant ambition for Enovix at the present moment given the clear focus on scaling up in consumer electronics in the near-term, I think that management is receiving meaningful interest from automotive OEMs and R&D efforts for mobility in Fab-1 will be key to drive this to the next level.

In particular, management mentioned the target of generating hundreds of millions in revenue from the operation of multiple lines at Fab-2 by 2026.

Today, the key focus for me for Enovix is the ramp of Gen2 and Fab-2 given this involves larger volumes to larger customers.

In terms of the timeline, gen2 autoline looks on track to complete factory acceptance testing by January 2024, and this will be followed by site acceptance testing and start of sample production in April 2024.

The company intends to move into high-volume production in 2H24, shortly after initial sampling, to support the start of smartphone revenue across multiple models and production lines in 2025.

Factory acceptance testing

The factory acceptance testing of Gen2 equipment is on track for completion by early 1Q24.

Enovix is working through the factory acceptance for its four zones of equipment from Zone 1 to 4.

Zone 1 is the laser patterning segment which should complete factory acceptance testing by October, while Zone 2, which is the electrode stacking segment, is expected to be completed by the end of 2023. Zones 3 and 4 are expected to complete between the end of 2023 to early 1Q24, and this would include the electrolyte filling, pre-lithiation, formation of cell, and testing segments.

If everything goes according to plan, the factory acceptance testing will be fully completed by January 2024, before the targeted start of first sample production from Gen2 in April of 2024.

As the factory acceptance testing is completed, Enovix expects to ship equipment to Fab-2 and once these equipment are installed, they will then proceed with site acceptance testing and validation to ensure all process steps are controlled well.

On top of Fab-2, Enovix is setting up its technology and materials development Agility Line in Fremont, which will be followed by a second higher-volume custom cell development Agility Line in Malaysia which can transition well to high-volume manufacturing as needed.

Third party validation

Recently, a Tier-1 wearable company hired a third-party testing lab to evaluate advanced batteries for their next generation product.

Enovix's IoT & Wearable cell exceeded the requirements of this Tier-1 wearable company, which includes cycle life, storage testing and high energy density, amongst others.

Enovix's IoT & Wearable cell also outperformed all competitive cells, including other advanced silicon batteries tested.

According to Polaris Battery Labs, the cells from Enovix not only met the customer’s performance specifications but also “have shown the highest energy density among the cells evaluated” and “perform better than other silicon products we’ve assessed in our lab.”

In addition, Polaris Battery Labs also stated that they are "impressed by the performance of the cell and the commercial availability of their products for a variety of OEM applications".

I think receiving third-party validation is a very encouraging sign for Enovix, signaling the company's superior battery performance and technological advantage to meet the needs and demands of these next-generation products.

Lower cash use

For the full year of 2023, Enovix is lowering its operational cash use from $120 million to $110 million as a result of the strategic realignment of Fab-1.

The capital expenditure forecast was also lowered from $70 million to $65 million as a result of the timing of a part of Gen2 equipment being installed in Malaysia, which has no impact to the start of production in Fab-2.

Valuation

Given Enovix is tracking in terms of progress, there are no changes to my one-year price target for the company after this earnings review.

As a result, I reiterate my price target of $22.70.

These price targets are based on a DCF model discounted to 2024F for the one-year price target, as mentioned in the earlier Enovix article.

Conclusion

I think 2024 will be a highly important year for Enovix to set the right foundation for its ramp phase.

From 2025 to 2027 in particular, we will see revenue inflection given the continued ramp and from there, start to see more meaningful progress on Enovix's profitability story.

While we are still in the early days, I continue to see Enovix as well positioned for long-term success given the strong demand, great management team and a product with a solid value proposition.

The management team has executed well thus far and remains on track to transition to high-volume production in Malaysia in 2024.

Along the way, we have also seen the company make strategic moves like the acquisition of Routejade, and the strategic realignment of Fab-1 to accelerate the technology development, lower its cost structure and improve its manufacturing.

I continue to monitor Enovix’s Fab-2 progression closely given this will bring about the key revenue inflection and it is more important than near-term revenue generation, in my view.

Based on the progress made in 3Q23, I think that Enovix is setting itself up for long-term commercial success.