The bullish case for ENVX / Enovix

Posted on by mechpaul

A case for $ENVX:

If you already know what Enovix is and what they’re out to do, you can skip to SECTION II.

Now that $ENVX has published information about their merger and I’m fully invested into my positions, I bring everyone my DD here.

Reference: Enovix Investor Presentation

I will refer to this document as “(EIP, whatever)”

Reference: Enovix S-4/A

I will refer to this document as “(S-4/A, whatever)”

Reference: Enovix White Paper

I will refer to this document as “(White paper, whatever)”

Disclaimer:

This DD contains forward looking statements which may become incorrect. Invest at your own risk.

TJ Rodgers:

The man. The legend. The god of execution on wall street. The man of underpromise and overdeliver. This guy will knock your socks off.

You can’t talk about Enovix without talking about TJ Rodgers and what he’s done at every company he’s ever worked with. Namely Sunpower, Cypress Semiconductor, Enphase, and now Enovix. This is a guy that understands Semiconductors. When something happens in the semiconductor industry, panelists call on him to give his opinion (1, 2, 3). He’s the guy that helped take EnPhase from $0.50 to $160.

When you invest in Enovix, you are investing alongside TJ Rodgers and his $21M stake (which does not even include his SPAC promote stake). TJ Rodgers currently owns 11.3% of Enovix (S-4/A, Page 55, final bullet), and he controls over $200M worth of shares and $34M in warrants (S-4/A, page 56, bullets #2 and #3.v). If you want TJ Rodgers money, invest like TJ Rodgers.

SECTION I.A: What is Enovix trying to do?

Enovix is a battery maker for mobile devices. They are the first to market with a fully working silicon anode battery that has been tried and tested by customers with orders funded. The silicon anode battery that Enovix has created is approximately 30-35% more efficient per liter than competing lithium ion batteries (EIP, slide 17). Customers can use this increased efficiency for smaller battery size or increased battery capacity at the same size of a lithium ion battery. Increased efficiency batteries can be used in smartwatches (Apple Watch), AR/VR devices (Facebook Oculus, Sony Playstation VR), mobile radios (Motorola radios), EVs (GM/Tesla), and cell phones (Android/iPhone), just to name a few types of popular device categories. Though, feasibly, Enovix’s batteries could be used anywhere a rechargeable battery could be used. This increased battery efficiency can help customers differentiate their product with more battery capacity or they can include more features with the same battery capacity as the previous graphite-based battery. Since space is at a premium for mobile devices, customers are willing to pay more for the competitive advantage that silicon-anode batteries bring to the market.

Enovix isn’t just seeking to create a new battery that will outcompete others. They are seeking to dominate the entire battery industry. Imagine you are company XYZ competing with company ABC. The ABC company starts using a 30% more efficient battery than you. How will you react when Enovix is the only company in the market that has this technology? You have to buy from them or be left in the dust. Because of this market moving effect, it’s buy from Enovix or die. This is already evident in one of their first customer wins. One customer has already purchased an exclusivity agreement with Enovix for their industry (S-4/A, page 37, “Customer Risks”).

Plus, that’s just the EX-1 battery which Enovix is selling now. By 2023, they project to have the EX-2 battery which is 14% more efficient than EX-1. By 2025? EX-3 which is 40% more efficient than EX-1 (EIP, slide 34)!!! Plus all the additional benefits of silicon anode batteries. Talk about a market defining product!

Futhermore, it’s important to think about the source of the cathodes and anodes for these batteries. For all conventional Li-ion batteries, they are made with graphite. To date, there are no graphite mines located in the USA (white paper, 13), whereas silicon makes up ~28% of the earth’s crust. Graphite is subject to wide fluctuations in price (Statista), whereas the abundance of Silicon means it can be sourced locally and the price is much more stable as it’s a far more common element. Moving to a silicon anode battery is better because it stabilizes the price, increases the cell pack density, and can rely on domestic production – an important fact for military and defense consideration.

SECTION I.B: Strategy

Their strategy these next few years can be divided into three phases (S-4/A, page 196, “Enovix Growth Strategy”) (EIP, slide 51)

Phase 1: Build Enovix’s own plant (“Fab-1”) and begin the creation of their own silicon anode battery plant. This is Enovix’s current phase. They are using the SPAC funds to purchase the equipment, facilities, materials, and staffing expenses. This fabrication plant will be approximately 250 MWh (S-4/A, page 197)

Phase 2: Buy an existing lithium-ion battery plant and convert it to use Enovix’s technology (“Fab-2”). Their technology to create batteries is 70% similar to regular jelly roll lithium-ion batteries which should allow for an easy retrofit. Fab-2 location is already selected and negotiations are starting. If all goes well, Enovix hopes to begin retrofitting it in 2022 (S-4/A, page 103)

Phase 3: After the successful retrofit of Fab-2, begin licensing their technology to other lithium-ion battery producers to use Enovix’s technology for which Enovix would receive a cut. (“Fab-3”)

For an image view of the strategy, click here (White paper, page 11)

SECTION I.C: But why not EV batteries? Isn’t that supposed to be the hot new thing?

(EIP, slide 20)

So, you might be wondering, “Well, why doesn’t Enovix get into EV batteries?” The answer is, “They will, but it’s far more profitable to get into mobile devices first.” You see, when it comes to EV batteries, they don’t demand much of a premium. Customers buy batteries in bulk and the producers only make money in volume. Well, Enovix is still very small, so they don’t have much volume. Therefore, they need to chase profit. What brings the most profit? AR/VR devices, smart watches, laptops, mobile radios, and the like. So Enovix will make these first, then eventually get into EV batteries by 2025, especially as there’s more of a market for longer range batteries with the increased efficiency of the silicon anode battery.

SECTION I.D: Proceeds from the SPAC

(S-4/A, page 216)

The SPAC proceeds include:

  • $225M from the SPAC
  • $175M oversubscribed PIPE at $14/share, higher than most other SPAC PIPE pricing (Benzinga)

These proceeds will be used for the following (S-4/A, page 197):

  • Build-out and production ramp of Fab-1 manufacturing facility in Fremont, CA
  • Purchase and retrofit an existing battery facility (Fab-2) for growth

The SPAC proceeds will fully fund the operations. No new debt or issuance of shares are projected.

SECTION II.A: The bullish case for Enovix

There are plenty of companies in the past with awesome products but could not find a market fit for it. Perhaps it was ahead of its time and the market wasn’t ready for it, or maybe the product timing is too late. Not at all with Enovix. Their products are right on time because they have customers that not only ordered batteries from Enovix, but they also helped to fund the battery’s development (EIP, slide 10)!

The presentation makes reference to two Tier-1 customers that invested in the product for their specific market. Other investors include Intel, Qualcomm, and Cypress Semiconductor. Tier-1 customers have already sampled the product and Enovix will begin shipping to these customers starting next year (EIP, slide 48).

Based on the presentation given above, I think we can take a few guesses at who the Tier-1 customers are and what we can expect for next year.

SECTION II.B: Inspection into Enovix’s customers

Let’s look at the slide showing the top 5 customer design wins (EIP, slide 22).

Laptops

There are three dominant makers of laptops: Dell, HP, and Lenovo. Although Acer and ASUS do make a lot of laptops, they are not a market leader as the slide states. Apple is up there and they make a lot of profit per laptop, but they are also not market leaders. That leaves Dell, HP, and Lenovo. If we look at personal computer shipments for HP in both desktops and mobile PCs, you’ll see that they shipped 15M units/quarter for the past several years. I am unable to find a number that supports 15M laptops in 2020 as referenced by the slide.

However, let’s take a different approach. Where are these companies headquartered? After all, Enovix is based in Fremont, CA. If they could work with local companies, it would greatly accelerate design of the new laptops. Well, Lenovo is based in Hong Kong; Dell is based in Round Rock, TX; and HP is located in Palo Alto… hey… wait a second! HP is located very close to the Fremont headquarters of Enovix! And their laptop shipments make sense in light of total PCs shipped. For these reasons, I’m going to speculate that HP is their laptop customer.

Land Mobile Radios (LMR) Market Leader

I wasn’t able to find much data here, but the most major local manufacturer of domestic LMR would be Motorola. Enovix also uses the same LMR terminology that Motorola uses. This is more of a stab in the dark than anything, but I’m going to guess Motorola.

Smartwatch market leader

There are four major players in smartwatches and wrist-based devices: Garmin, Apple, Samsung, and Fitbit as you can see from this pie chart here. But let’s look closer at the Canalys article they reference. In this article, the only reference to the number 4 (as shown in the slides) is referencing Apple Watch Q2 2020 new users. The slide says “2020 customers served”, so how can Enovix state that this is 2020 customers served when they’re referencing an article in the MIDDLE of 2020 and it’s only referencing Q2 new customers? I think Enovix fricked up their analysis here. But based on this research, the only possible outcome is Apple.

Plus, in a previous slide, Enovix said they had two Tier-1 customers. I’m going to use one of my Tier-1 customer coins here to choose Apple (for second tier-1 coin, please see “AR/VR market leader” below).

But let’s think one step further. Enovix will already be selling to a market leading laptop manufacturer. I think you can bet your bottom dollar that Apple will be watching that laptop vendor to see how the silicon anode battery fares with consumers before deciding on including the battery in their own Macintosh lineup. After all, the Smartwatch is only one part of Apples net sales of one category, but Macintosh is in a category unto itself. Getting into a large company like Apple is a piecemeal process. A small company like Enovix doesn’t currently have the battery capacity to produce everything Apple needs for both smartwatches AND laptops. So, start with a smaller item then work your way up. Let’s hope for Fab-2!

Anyway, I’m getting ahead of myself. Onto the next category!

AR/VR market leader

There are only two huge contenders in this arena for the US market: Sony’s Playstation VR and Facebook’s Oculus.

If we look at the history of shipments for Playstation VR, they only shipped 1M devices in 2019. But if you look at the actual chart that Enovix is referencing, it shows Oculus and Playstation in a dead heat. So, which is it? I’m going to bet it’s Facebook not only because they’re local to Enovix with a 20 minute drive to Palo Alto, but also based upon a post from Cameron Dales on LinkedIn wherein he references Facebook and Apple and how they need new batteries. I believe this LinkedIn post further cements that Enovix will be creating a future relationship with Apple that will go beyond Smartwatches.

Whoever this AR/VR market leader is, they want exclusivity through 2024 (S-4/A, page 37, “Customer Risks”). Enovix has also won contracts from two major AR/VR customers (S-4/A, page 191, “AR/VR”). There is also “explosive growth potential such as AR eyewear” (S-4/A, page 197)

This is my second Tier-1 customer coin that I’m going to use.

Future Customers

Enovix has listed some future customers that they would pursue, especially including the US military and defense , solar and wind renewables, and behind-the-meter utility grid storage (white paper, 13)

SECTION III.A: The bullish case for $ENVX

PEOPLE:

  • TJ Rodgers: the god of execution. The man that brought Enphase from $0.50 to $160. Multiple billion dollar companies. History of semiconductor manufacturing and now running another semiconductor manufacturing company.
  • Greg Reichow is on the Enovix Board. He previously worked at Tesla on the Supply Chain aspect and for battery/motor/electronics during the time when Tesla Model S was released.
  • Due to TJ Rodgers, Chairman of ENVX, sitting on the boards of Enovix, EnPhase, Solaria, and FTC Solar and former chairman of SunPower; Chuck Stone, VP manufacturing / Enovix, previously working for SunPower; Joseph Malchow, Director, serving on the board of EnPhase Energy (who also, by the way, runs RICE SPAC); Due to all these partnerships and similarity, I speculate that in the future there will be some synergy between Enovix, EnPhase, FTC Solar, and SunPower to bring about BESS (Battery Energy Storage Systems), akin to the product that Tesla already has – leading to a horizontally integrated ecosystem across suppliers. I mean, that’s a huge speculation, but there’s so much synergy here it’s difficult not to at least note it. This expansion into BESS isn’t entirely speculation. It was also noted in the Enovix’s white paper (A Strategy for U.S. Leadership…, page 3/5/11/13)

PRODUCT:

  • Demand currently outstrips supply for Fab-1 (S-4/A, page 34, bullet 3).
  • Their next product, EX-2, will be 15% more efficient than their current model and coming out in 2023. EX-3, coming out in 2025, is 30% more efficient than EX-1 (EIP, slide 34).
  • Viral product – once one business gets the advantage of a silicon anode battery in their products, all competitors must get a silicon anode battery just to compete. Compete or die. This is a market defining product for mobile devices. The virality of this product is already noted with an exclusivity agreement with one potential customer (S-4/A, page 37, “Customer Risks”).
  • Sticky product – Once a customer starts buying from Enovix, end users will expect that the battery life will not change or improve from generation to generation of the customers product. Therefore, once a customer starts buying from Enovix, that can make it difficult to switch away from Enovix. The product will eventually bleed into all the customer’s products. For example, if Apple starts buying the batteries for their smartwatch and it works well, then it’s not a large jump to place Enovix batteries into Macbooks and iPhones.
  • 89 patents issued for their silicon anode technology (S-4/A, page 197, “Intellectual Property”)
  • Tested, viable products since 2018 (EIP, slide 56)
  • Allows for domestic battery production due to domestically available silicon, an important factor for the US Military (White paper, page 4)

CUSTOMERS:

  • Apple, Facebook, and HP as customers. Not including the top 5 customer wins, 15 more customers that we don’t know anything about (EIP, slide 56).
  • Investors from Intel and Qualcomm and (if my speculation is correct), Facebook and Apple (EIP, slide 10). We don’t even know how Intel and Qualcomm will be using the partnership!
  • Halo effect – Once Enovix starts working with large suppliers, it goes a long way building trust with all other suppliers and large companies.

PROCESS:

  • Fab-2 location already selected and currently in negotiations to purchase the battery plant (S-4/A, page 103). Once this battery plant is purchased, Enovix will retrofit it with their technology to prove its efficacy before licensing joint venture deals with third party battery plants. Fab-1 is anticipated to have 254 MWh production by 2025 and Fab-2 expected to have 1.53 GWh of production by 2025 (S-4/A, 103)
  • Future joint venturing deals where they will license their technology to third party battery plants starting in 2023 (EIP, slide 51).
  • After lengthy automotive qualifications, EV plans starting in 2024. (EIP, slide 51)
  • First movers advantage. No one else currently has a productized, marketable 100% silicon anode product.

SECTION III.B: Valuation

The closest company to Enovix would be QuantumScape or SolidPower (DCRC). Since SolidPower has only achieved DA with DCRC and is not publicly traded, I cannot use this for a direct comparison for valuation. Therefore, I’ll only be looking at QuantumScape.

In this document, I’ll be referencing the QS/KCAC (QuantumScape, Kensington Capital Acquisition Corporation) S-4/A filing as “(QS/KCAC S-4/A, whatever)”

Here are some of the ways in which they are similar:

  • Merged with a SPAC (RSVA in the case of Enovix, KCAC in the case of QS)
  • Has or will complete mergers with their respective SPAC within the last year or very soon
  • New, patented battery products never-before-seen commercially
  • Batteries can be used in EVs and mobile devices (EIP, slide 20), though QuantumScape is primarily focused on EVs (QS/KCAC S-4/A, page 156)
  • Pre-revenue companies (EIP, slide 55) (QS/KCAC S-4/A, page 101)
  • Both building out battery plants within the next 5 years (EIP, 51) (QS/KCAC S-4/A, page 101, “Other Non-Financial Metrics”)

And now ways in which Enovix and QuantumScape differ:

  • Enovix has first mover advantage, incorporating in 2007 as compared to QS’s 2010 (EIP, slide 56) (QS/KCAC S-4/A, page F-7) as well as a publicly available product this year.
  • Enovix delivered and tested samples by tier 1 customers with currently funded orders (EIP, slide 22). QS has met technical milestones for Volkswagen (Ref) and received more funding for their battery research, but does not have any funded orders.
  • Enovix has 20 customers (EIP, slide 10). To date, QS is a research company funded primarily by Volkswagen with no publicly available product and only one current well-known customer.
  • Enovix’s first profitable year is 3 years sooner in 2024 for Enovix (EIP, slide 56) compared to 2027 for QuantumScape (QS/KCAC S-4/A, page 101)
  • Enovix will have a combined production capacity of 1.77 GWh by 2025 for Fab-1 and Fab-2 (S-4/A, 103) whereas QS will have a combined production capacity of 0.8 GWh by 2025 for QS-1 and QS-2 (QS/KCAC S-4/A, page 101)
  • Enovix does not have a 188 page damning report about their production capacity (page 33), product validation (page 36), projected revenues (page 183), and current cell design (page 22, 31) (Scorpion Capital). I am not agreeing with Scorpion Capital, nor do I care about their claims. I only care insofar as the report exists and had a 10% immediate negative impact on the share price (Benzinga) and no such similar report exists for Enovix.
  • QuantumScape has a heavily diluted share price (QS 2021 Q1 Shareholder Letter, page 9) with over 370M shares outstanding, an increase of ~130M shares YoY, and no projected profit for 6 more years (QS/KCAC S-4/A, page 101) . Enovix’s shares outstanding is far less diluted with only 105M shares post-combination available (S-4/A, page 2), operations fully funded by the SPAC through Fab-2’s completion in 2023 (S-4/A, page 197), and a clear path to profitability in 2024 (S-4/A, page 102).

Since Enovix is clearly a better value than QS, let’s look at the current share price of QS at $29 as of June 25, 2021 (Yahoo Finance: QS). Keeping in mind that QS is 3x+ more diluted compared to Enovix as well as all the previous advantages listed, consider what the current share price of Enovix should be?

SECTION III.C: Other blog posts and marketing material

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