Finding a company that could produce a breakthrough in lithium-ion battery technology is the quest for the holy grail in energy circles today. While lithium-ion batteries have been shown to be effective enough today to electrify segments of the energy market previously dominated by fossil fuels, they are still a higher-cost option with limitations. If a company can change the equation in regard to lithium's capacity, then it could be poised to capture an incredible market opportunity.
Enovix Corporation (ENVX -9.41%) is one of the companies trying to change that equation, and its product looks promising. Does this battery tech SPAC have what it takes to become a major player in this space and become a big winner for investors? Let's take a look at what Enovix has up its sleeve and whether it is a buy today.
Enovix's approach to lithium-ion batteries
For the past few years, many of the improvements made to lithium-ion batteries have come down to battery chemistry. Tweaks to the cathode materials -- the side of the battery made of lithium compounds -- have improved energy density (how much power you can pack in a battery), cycle times (the time it takes to charge), and degradation (the battery's capacity after hundreds of charges).
Many of the battery tech companies out there today are trying to find new ways to pack more power into the cathode through changes to chemistry or the state of the matter (solid state versus liquid electrolytes).
Enovix isn't doing any of this. Instead, it is focusing on improving battery cell architecture. Most battery cells look much like your typical AA battery. The anode, cathode, and separator layers are pressed together and then wound in a roll (looking like a Little Debbie Swiss roll on the inside).
Enovix's founding team took their approach from their experience in the hard drive and semiconductor manufacturing industries -- its CEO, Chief Technology Officer, and VP of research and development all previously worked at both IBM and FormFactor -- and redesigned the cell architecture.
Now, those pressed layers are cut into short lengths and stacked horizontally (looking like a club sandwich on the inside). This unique architecture also allows for the use of a silicon anode instead of conventional graphite anodes, improving energy density. Based on Enovix's published results, this architecture drastically improves the energy density, reduces degradation of the silicon anode, and improves cycle times.
Enovix's approach to the market
Everyone's first thought about improved battery technology is its application to electric vehicles (EVs). While attacking the EV market is a long-term goal, Enovix sees an opportunity to monetize sooner in smaller applications. Smart watches and health sensors, smartphones, augmented reality (AR)-connected devices, laptops, and battlefield devices for the military are some of Enovix's short-term market goals.
These markets could be amenable to this type of product because of the volume and weight constraints of their products. Being able to produce significantly more power at less weight or in a smaller space comes at a higher premium than in EVs right now. Combined, these smaller cell markets are estimated at around $13 billion, so there is plenty of market to attack here early on.
This approach is bearing fruit, as management has so far announced eight design wins from customers and deliveries of commercial cells from its fabrication lines. Management estimates that its revenue funnel of projects in design and design wins is about $414 million.
The road ahead
Enovix's tech does sound promising, and some early design wins show that there is customer appetite for this particular battery tech. That said, there is a big difference between winning some contracts and becoming a profitable business over the long term.
Enovix needs to show that it can commercially manufacture this unique battery architecture both at scale and at adequate margins to generate returns. Management says that it has a line of sight on around $1 billion in annualized revenue and has a long-term goal for gross and EBIT (earnings before interest and taxes) margins of 50% and 30%, respectively.
But management also admits in its 10-k that the manufacturing process is extremely complex, and it is hard to project operational performance and costs. The most recent income statement says that it generated net income last quarter, but that was entirely from the exercise of warrants and not from the business' operations.
The biggest concerns here are time and cash burn. Enovix has about $384 million in cash on the books and expects to spend between $160 million to $180 million this year in capital expenditures (not including any operating cash losses). At this rate, it has less than a two-year window to get its operations up and running and generate enough cash to fund its capital plans without diluting shareholders or taking on debt.
Adding all this up, we have a company with tech that appears to be more market-ready than most other start-up battery technology companies out there. It isn't "EV or bust" for this company either, so there are more options to be successful. That said, this is a fiercely competitive industry today that could be disrupted by other innovations, and the company's cash burn rate says it needs those design wins to become real revenue soon.
It's hard to say what this company should be worth today. So determining whether it is a buy or not rests solely on how much you believe management can execute its plan. If we were to see some announcements soon that it is scaling up deliveries of cells to customers in the coming quarters, then that would be a really good sign. Right now, this is probably one of those "flyer" stocks that make up an incredibly small portion of one's portfolio. If it takes off, then great, but it's certainly not one you want to make a huge bet on yet.