The share price of lithium battery developer, Novonix Ltd (ASX: NVX) has been on an absolute rampage, gaining over 170% since the start of the year.
In addition to the company releasing a string of positive announcements, this sector which focuses on renewables and electric vehicles (EVs) seems to be all the hype at the moment, so there appears to be a lot of momentum behind this rally.
Novonix background
Novonix develops and commercialises ultra-long-life high-performance anode material for the lithium-ion battery market. The company is focused on electric vehicle and energy storage applications that demand long life and high performance.
The company received some attention in June last year when it was rumoured that Tesla Inc (NASDAQ: TSLA) would potentially use Novonix’s battery technology in its electric vehicles. After the rumours dissipated, the Novonix share price fell by roughly 50% and traded at around $1 per share up until recently.
NVX share price
Recent developments
Last week, Novonix announced that its US-based subsidiary, PUREgraphite, had been selected to receive a grant from the U.S. Department of Energy (DOE) worth US$5.6 million.
PUREgraphite will partner with Harper International and Phillips 66 as part of the funding opportunity and the grant will be used to support the development of a new high-efficiency furnace technology for lithium-ion battery synthetic graphite material.
Novonix also recently announced the appointment of Professor Jeff Dahn as Chief Scientific Advisor, effective July 2021.
Prof. Dahn is currently a leading researcher in the field of lithium-ion batteries and materials. He’s spent the last 25 years as a professor at Dalhousie University, with support from 3M Company and most recently, from Tesla.
Novonix also disclosed that Prof. Dahn and his university research team will continue to work alongside Tesla.
Looking ahead
Novonix currently operates the PUREgraphite anode material plant, which will soon be producing around 2,000 tonnes per year of synthetic graphite. Around 500 tons will be supplied to Samsung SDI, one of the world’s largest lithium-ion battery makers for EVs.
Novonix is the only US supplier of synthetic graphite to tier-one EV producers and also has a non-binding agreement with Sanyo Electric (a subsidiary of Panasonic) to assess production materials from the plant.
Through its partnership with Harper, the next generation of furnace equipment is scheduled to commence installation in February 2021. According to Novonix Chief Executive, Dr Chris Burns, the improved technology will facilitate significant production growth, with phase 2 expected to be around 25,000 tonnes per year.
Is the Novonix share price a buy?
I think this is an exciting growth story that’s being propelled by some structural tailwinds at the moment. Renewables looks like a promising alternative to fossil fuels, so there’s a large total addressable market (TAM) that could continue to grow if this sort of technology continues to gain popularity.
However, trying to get a rough sense of value for Novonix can be quite tricky.
As a producer of a commodity, the selling price is often set by the market and can vary depending on many factors, but is mainly dependant on supply and demand.
Trying to predict synthetic graphite prices years from now could be a fairly challenging task. And using models such as a discounted cash flow analysis could be sensitive to even small changes in the underlying commodity price, which means it might be hard to accurately compute the intrinsic value of these shares.
Like many emerging growth companies at the beginning of the lifecycle, it’ll most likely be hard for a company such as this to pass through an initial screening process that would consider fundamental ratios such as price-to-sales (P/S) or price-to-earnings (P/E), as the company is yet to fully scale its production capacity.
The above ratios should not be the sole determinants in assessing a business. Although it’s a vastly different company, let’s take Xero Limited (ASX: XRO) as an example, which looked expensive relative to its sales and was unprofitable a few years ago. However, Xero managed to scale and achieve high rates of growth due to various qualitative factors.
As you can see, traditional valuation metrics such as P/S and P/E ratios have their place, but they’re limited to being one of many tools, rather than an ultimate decider in the investment decision-making process.
Looking back at the Xero example, what could’ve been more useful than a P/S ratio was having an in-depth qualitative understanding of the company and the current market, in order to gain a competitive edge over other investors.
If I were thinking about investing in a company such as Novonix, I’d take a similar approach and consider the long-term factors that might contribute to the potential success of the company, while also assessing certain aspects such as the strength of the management team and the competitive landscape.
I haven’t done enough in-depth research and as such, I’m happy to put this one in the too-hard basket for now. But Novonix is certainly one I’ll be watching closely in 2021.
If you’re looking to become a better investor, I’d recommend checking out Rask’s Value Investor Program, which covers aspects such as moat assessments and management team analysis.
While it focuses on quantitative aspects (e.g. valuation techniques) as well, these qualitative elements are a valuable part of the due diligence process and might be useful for a company such as Novonix.
