Enovix sinks, but the news is not so dire
Shares of startup battery maker Enovix sank as it said it will cut production in Fremont, California, in order to ramp up production in Malaysia. That is not inconsistent with what CEO Raj Talluri told me in August: he knew Fremont would never be the company’s future.
The Street hates surprises, which is why shares of Enovix, which is working on a revolutionary silicon-based lithium-ion battery, saw its stock drop over twelve percent Tuesday after it announced it would shift some its manufacturing focus from its factory in Fremont, California, to one in Malaysia.
I think the change may not be as dire a situation as people are taking it as. But Enovix is basically a startup company, facing plenty of challenges, and any perceived shift in its strategy can make the Street nervous.
I interviewed CEO Raj Talluri in August. What is clear from that interview is that the main challenge for the company is to ascend the manufacturing curve, to crank out batteries in high volume. People get nervous when it seems suddenly that strategy is being changed.
The disturbing news Tuesday was that the company said it is laying off workers and cutting contractors at its Fremont factory as a “strategic re-alignment.”
The company is not only shifting the volume of production from Fremont to Malaysia, it is also changing its business emphasis, it said.
The company will focus more on custom-sized battery sells rather than standard-sized parts:
We are moving from a horizontal business strategy focused on serving hundreds of customers with a standard-sized battery to a vertical business strategy focused on a smaller group of very large customers who require custom cells, which allows us the most efficient path to scale. This shift has been informed by our strong engagement with leading smartphone OEMs who we anticipate having high volume needs for our battery in 2025 and, in turn, qualification samples in the near-term.
On top of the uncertainty of change that investors hate, the shutting off of production in Fremont means the company missed its production goal this quarter, it said, churning out only 24,000 battery cells versus a promised 36,000.
Things may not be as bad here as they seem.
When I interviewed Talluri, he was clear that the higher volume of production would ultimately be in the company’s Malaysia facility, which is being outfitted with machines that can produce in much higher volume, on the order of 1,350 units per hour versus a hundred per hour at Fremont.
“The factory in Fremont is not my main factory because I'll never get it to produce millions of batteries,” he told me then. “So, that's not what's going to move the needle for the company.”
In Malaysia, in contrast, “We put in serious automation, and we bought some much, much faster equipment, and we are doing things in parallel and so on” to boost yield.
I asked Talluri at the time, “What can go wrong” with factories. He was blunt, telling me, “things never work out the way you want” when you are bringing manufacturing up to speed.
Now, what Talluri has in fact done is say that he’s going to make that switch over to Malaysia in a very abrupt fashion. And that suddenly raises the question of whether there’s going to be a big gap in production, and sales, as Malaysia is ramping up. That’s the kind of uncertainty people hate.
That is a big change from the steady progress the company had been notching of late. In the first quarter, they forecast making 9,000 cells, and they instead created 12,500. In the second quarter, they forecast making 18,000 and instead were able to reach 22,400. As I said, this quarter, that was supposed to rise to 36,000 but will now be just 24,000.
In a note to clients on Tuesday, George Gianarikas, who is a bull on the stock, says something similar to what I’m saying: “stay calm and carry on.”
The company, writes Gianarikas, is “making the right, albeit unpopular, decision.”
Enovix has had stumbles in past, before Talluri came onboard this year. Writes Gianarikas, “We understand investor reaction given previous manufacturing concerns, but this announcement is not the same.” Rather, “the plan is on track,” and “Mr. Talluri is making a well informed, experienced decision.”
Another way to look at all of this is that Enovix is a startup company, and startups are full of surprises. If you can’t handle that, you probably shouldn’t be investing in a startup.
With Tuesday’s drop, the stock is down fifty percent this year.