Driving market sentiment is a myriad of factors, but probably most important among them is the Risk-Free Rate. The RFR has moved from more or less 0 to 4-5%. For institutional investors and those who move markets, this has a dramatic influence on what type of estimated return they are willing to pay for in a riskier stock. Investors who would potentially have been comfortable with a 10% compounding return 3 years ago in a speculative play like NVX now might demand 20% based on their 2030 estimates to account for the higher bond yields, which are guaranteed returns.
Fed tightening in the USA has knock-on effects throughout the world and specifically in risky invesments. It's not just the RFR, but also the liquidity that is an issue and the Fed has been tightening quite a bit. The money that previously was searching desperately for returns has been called home and so less buying pressure has been a result.
Cyclical contraction in China. China's economy has been under a bit of pressure for some time and a slower growth rate is resulting in a glut of batteries. I've seen reports of new, small orders in the sub-$100/kWh range. Larger orders for LFP at less than $60/kWh. Battery suppliers across the chain from anode to cathode to separator and electrolyte producers have too much capacity at the moment. This has lead to a...
Sharp drop in battery related commodities Lithium carbonate spot price for example is down 85% from highs of around 15 months ago. Graphite is no different and it leads some more nervous types to question if NVX can manage to keep margins at a reasonable level once they reach scale (if they ever manage to produce any that companies offtake.)
Speaking of offtake, they were supposed to sell to Kore in 2023. Well, originally they were, but Kore had some delays and perhaps Novonix did too. These things are tricky and they take time, so delays are not too surprising, but they have put pressure on the stock nonetheless. A skeptic would wonder if they will continue to delay for years till running out of cash.
Speaking of cash, this is a super expensive, capital-intensive project to launch. A valuation in the USD Billions allows for some limited dilution to find dollars for CAPEX. A valuation in the hundreds of millions would mean EPIC dilution for shareholders if NVX has to go to the current capital markets which as noted earlier are not too excited about pouring money into speculative plays without a very high implied rate of return to offset risk.
US domestic OEMs meanwhile are floundering with their EV growth agendas. GM's ultium project is looking like a complete disaster. Ford is doing a bit better with the sales of its Lightning and Mach-E, but investors are looking at these vehicles with distain as they manage between -50 and -105% margins depending on the quarter. Legacy OEM EVs are languishing on the dealer lots as consumer euphoria for the flashy new EVs react to higher interest rates for financing, limitations due to poor charging infrastructure, and the politicization of electric vehicles as the MAGA boogieman of the car industry.
Meanwhile, we are coming off a massive sugar high as Tesla showed the world it could be done and had massive stock appreciation. Everyone wanted another piece of the EV pie and many, very many EV related stocks had huge growth. Many will go to zero. Most investors are not equipped to discern the Lucid, Nikola and Fisker from Tesla, Novonix, and ??? of the market. So they dump all of the pre-profitability stocks without much discernment. If your company is not Default Alive (can operate indefinitely without outside capital) you are Default Dead.
All of these factors and more lead to very VERY ugly chart. Technical investors and shorters see the trend as their friend and pile on. The downtrend is destiny for them. More sellers in the market, few buyers willing to catch that falling knife. NVX is after all not profitable. Traditional business fundamental analysis holds no value for this company as it makes NO money. No FCF, no EBITDA, no EPS. Why buy here? No reason.
Now, I am still optimistic. Why? Glad you asked.
I'm optimistic that NVX will scale. When they scale, their timing will be great. The demand/supply balance in 26-27 will be in graphite deficit. All of the trends I mentioned above will be reversing and pressuring the stock in the other direction. Margins will be solid. China's export situation will be limiting graphite and US policy will re-institute the 25% tariff. Cyclical commodity prices will have reversed and I believe we will be in a battery commodity super cycle where NVX will have a strategic partner with Phillips 66 where they have a locked-in supply agreement. Novonix will have a superior product with lower overall costs, better ESG credentials, in a strategically important part of the US energy industry. Grid/utility scale storage projects will LOVE the high cycle and calendar life anode that Novonix can produce. Novonix will make plenty of cash at that point to scale/reinvest as needed for growth and produce a very nice dividend by 2030.
I rode the Tesla wave skyward and know how much fun it is when the market is re-rating a stock based on the crossover into profitability. Crossing my fingers that NVX experiences a similar reversal in sentiment.
NVX Price at posting:
63.0¢ Sentiment: Buy Disclosure: Held
(20min delay)