On another tough day on Wall Street, shares of Enovix (NASDAQ:ENVX) — an advanced lithium-ion battery manufacturer — suffered a brutal beatdown, losing 17% so far today at the time of writing. While management announced a strategic realignment of its Fremont, California-based Fab1 manufacturing hub and a workforce reduction, investors may have perceived the news as a scalability dilemma impacting ENVX stock.
According to the accompanying press release, Fab1 will transition to a “Center for Innovation.” On paper, the decision aligns with Enovix’s strategy to locate high-volume manufacturing in Asia near customers and suppliers. In turn, the underlying technical development can occur in both Silicon Valley and Asia.
Unfortunately for Enovix employees, the move will also necessitate a workforce reduction at Fab1. This directive impacts approximately 185 personnel, including over 125 contractors that helped support 24/7 manufacturing operations. Notably, management anticipates the restructuring to be completed during the fourth quarter of 2023 and result in annualized savings of about $22 million.
Moreover, management stated that it reprioritized company activities at Fab1, transitioning from a horizontal structure to a vertical one. Such a framework enables Enovix to focus on large customers who require custom cells. In theory, this pivot allows the tech enterprise to run the most efficient path to scale.
Scaling Concerns Spooked ENVX Stock Investors
Nevertheless, it’s the topic of scaling that may have spooked investors out of ENVX stock. Conspicuously, the decision to transition Fab1 to an innovation center may be perceived as a tacit admission that Enovix has struggled to scale its manufacturing operations.
Another major point that worries stakeholders of ENVX stock centers on the financials. While the battery innovator secured impressive contracts — especially with the U.S. Army — they have yielded little growth so far. For example, Enovix expects to recognize approximately $200,000 of total revenue from the Army program. It’s not nothing, but the enterprise needs many more of these contracts.
In the second quarter of this year, Enovix posted only $40,000 of revenue against a net loss of $64.3 million. Granted, management framed the discussion as an opportunity to expand its scale through high-profile endeavors. Still, investors have previously demonstrated anxiety over ENVX stock over the underlying firm’s acquisitive actions.
Moreover, it’s possible that options traders may be getting jittery. On Sept. 27, Fintel’s options flow screener showed big block transactions involving 2,005 written (sold) contracts of the Oct. 20, 2023 16.00 put. However, with ENVX stock going volatile since then, the screener shows recent trades involving bought put options at lower strike prices.
Potentially, major traders are covering the liability of their short put obligations by acquiring puts, which may be exacerbating downside pressure.
Why It Matters
Despite the ugly print for ENVX stock right now, analysts still maintain a strong buy consensus view. This assessment breaks down as six buys, one hold and no sells. Overall, the average price target lands at $37.83, implying 290% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
