AI Smartphones And Wearables Will Eventually Outweigh Current Manufacturing And Profitability Challenges

Catalysts

About Enovix

Enovix develops and manufactures advanced high energy density silicon anode lithium ion batteries for smartphones, wearables, IoT and defense applications.

What are the underlying business or industry changes driving this perspective?

• Although the company is entering the commercialization phase with A1 sampling to multiple tier one smartphone OEMs, any delay in completing qualifications or securing multi SKU design wins could push out volume ramp and limit near term revenue acceleration.
• While AI intensive smartphones and mobile devices are driving structurally higher battery capacities and dollars per amp hour, Enovix must quickly scale Fab2 and add additional high volume lines, and execution missteps or yield issues could pressure gross margin and extend operating losses.
• Although early traction in smart eyewear and AR glasses aligns with a long runway for always on, AI enabled wearables, the overall category is still nascent and product cycles uncertain, which could result in slower than expected unit adoption and more volatile revenue contribution.
• While the Korean defense asset and favorable tariff positioning support higher margin defense and industrial handheld demand, these specialized markets may not scale fast enough to absorb Fab2 capacity, risking suboptimal factory utilization and weaker net margins if consumer volumes lag.
• Although vertical integration in coating and faster materials prototyping can reduce costs and improve energy density over time, the capital intensity of maintaining cutting edge process capabilities could outpace early earnings growth and delay any sustained improvement in net income.

Assumptions

This narrative explores a more pessimistic perspective on Enovix compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Enovix's revenue will grow by 109.7% annually over the next 3 years.
• The bearish analysts are not forecasting that Enovix will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Enovix's profit margin will increase from -525.9% to the average US Electrical industry of 11.8% in 3 years.
• If Enovix's profit margin were to converge on the industry average, you could expect earnings to reach $32.9 million (and earnings per share of $0.13) by about December 2028, up from $-159.2 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 104.1x on those 2028 earnings, up from -11.9x today. This future PE is greater than the current PE for the US Electrical industry at 31.9x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.99%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Customer qualifications for the AI 1 smartphone battery and other products could take longer than expected or fail to meet stringent cycle life, safety and form factor requirements, delaying design wins and pushing out the commercialization timeline, which would restrain long term revenue growth and earnings.
• Scaling Fab2 and additional high volume manufacturing lines for a first of its kind 100 percent active silicon anode technology may encounter yield, throughput or equipment challenges, increasing unit costs and capex needs, which would pressure gross margins and extend operating losses.
• The company is still loss making and funding Fab2, Korean assets and R&D with existing cash, warrants and potential future capital raises, so weaker than expected warrant exercises or share price volatility could force dilution or slower capacity buildout, weighing on earnings per share and net income.
• Long term secular tailwinds from AI intensive smartphones, AR smart glasses and industrial handhelds may not translate into large, timely volumes for Enovix if incumbents defend share on price or if new device categories ramp slower than hoped, limiting the company’s ability to fill nameplate capacity and expand revenue.
• Reliance on favorable product mix, particularly higher margin defense and industrial demand from the Korean asset, could prove unsustainable if orders normalize or tariffs change, which would reduce blended gross margins and slow the path toward consistent profitability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Enovix is $10.0, which represents up to two standard deviations below the consensus price target of $26.9. This valuation is based on what can be assumed as the expectations of Enovix's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $279.1 million, earnings will come to $32.9 million, and it would be trading on a PE ratio of 104.1x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of $9.0, the analyst price target of $10.0 is 10.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.