Enovix: a short-squeeze candidate setting up for success

There are no few reasons to have shorted Enovix NASDAQ: ENVX over the last year. The company’s struggle to gain traction was compounded by an unexpected business shift that caused some headshaking. Ennovix closed its primary production facility, instead using it as an innovation hub as it transitions to an Asian-based production line. The company also switched gears, focusing on producing specialty batteries for a few customers instead of making standard batteries for everyone.

Those unexpected changes helped drive short interest to record levels, running about 25% in December and setting up the possibility for a short squeeze today. 

Ultimately, the changes are good and have garnered the attention of the analysts. Takeaways from the Q4 2024 chatter include kudos for execution and talk of long-term success in an industry expected to grow at a 30% CAGR. In addition to focus, the shift helps to differentiate the company from competitors like Amprius Technology NASDAQ: AMPX, which is focused on the aerospace industry. Among Ennovix's target end-markets are wearables & IoT, smartphones, laptops, EVs and other consumer-oriented products. 

Enovix, deeply undervalued or highly overestimated

The nine analysts tracked by Marketbeat.com have the stock pegged at Moderate Buy/Buy with only 1 Hold and no sells. Their activity was mixed in 2023, resulting in a YOY decline in the consensus target, aiding the decline in share prices, but the market sell-off ran too far. The stock is trading about 45% below the analysts' lowest price target and 120% below the consensus, suggesting a deep value for investors while providing fuel for a short squeeze. All the market needs is a catalyst.

Among the potential catalysts is ramping production and revenue. The company recently announced a contract from the Army that will help drive 1500 basis points in sequential growth in Q4. The contract is for batteries to help power soldiers' communications and navigation equipment. 

Ennovix batteries' benefits are dependence on graphite for anode material (it isn’t), higher energy density and faster discharge rates, making them perfect for virtually all use cases if they can scale production. 

As it is, the company is still in the early start-up phase, has little revenue, and the outlook for 2024 isn’t robust. The Army contract and acquisition of Korea’s Routejade will drive robust sequential and YOY growth but only $24 million in annual revenue, which is not much. The company is working to build out its capacity in Asia but has several quarters to go before it starts seeing significant benefits. The Malaysia facility is expected to start producing the first gen-2 products by May, assuming no delays. 

Enovix is a tightly held stock and well-capitalized

Ennovix is a tightly held stock, with insiders and institutions owning more than 65% of shares. Insiders hold about 15% and did not sell any during Q4, while institutions own about 50% and bought on balance for the three preceding quarters. Their activity is consistent with a bottom for the market and may persist into 2024. Vanguard and BlackRock are the two largest holders, so mutual funds and ETF activity account for a large portion of institutional activity but not all. Numerous 1% holders, including Geode Capital Management and Two Sigma Investments, provide broad ownership by strong investment firms. 

The company is burning cash, but not at an alarming rate. The Q3 burn was about $45 million, leaving the company with about two years of wiggle room at the current rate of cash use. There is some debt, but the balance sheet is net cash with an expectation of increasing revenue over the next year. 

The technical outlook: ENVX is moving sideways fast

The price action in ENVX is rangebound and moving sideways fast. The short interest suggests a move to the range's low end is possible, while analysts' sentiment and institutional buying suggest the opposite. The next visible catalyst is the Q4 earnings report scheduled for late February when the company will likely give another business update. Assuming that progress continues at the Malaysian production facility, the stock should begin to lift off. In that scenario, a move above the range mid-point near $16 could lead the market to another 50% gain.