Novonix (NVX) is an Australia-based battery materials and technology company. The tagline that greets you on their website says, “Better battery technology. Faster, cleaner and cheaper. Because the world needs it.” Hard to argue with that. It is a developer and supplier of materials, equipment and services for the global lithium-ion battery industry with operations in the US and Canada. NVX operates through three segments: Graphite exploration and mining, battery technology and battery materials. Might as well be one. 98% of its meagre revenue comes from battery technology. The flow chart below helps in understanding its operations. NVX is a $4.5bn company with revenue of a little more than $5m in 2021. If Marcus Today was valued on that revenue multiple, my scanty shareholding would make me a multimillionaire. Seems a bit farfetched but valuations are stretched as any central banker will tell you. An AFR article at the start of the month said it could be in a green bubble along with AEF. Recent news (A bit dry)

• At the start of the month, it was announced that NVX would be added to the ASX 200 index on December 20. It also told the ASX it had no idea why the share price had fallen 32.4% on December 3.
• In October, bought a manufacturing facility to help its expansion to 10,000t p.a. of anode production by 2023.
• Early August, Phillips 66 announced a US$150m strategic investment to help support a capacity expansion. A big vote of confidence in NVX. Phillips 66 had its debut as an independent energy company when ConocoPhillips executed a spin-off of its downstream and midstream assets.
• In May, filed a draft registration statement with the US SEC about a potential initial public offering via Nasdaq.
• In April, completed the installation of a first Generation 2 furnace system built by Harper. Key to its graphite manufacturing process.
• In February, completed a $115m equity raising. A further $16.5m was raised via directors through a placement.
• In January, received a US$5.6m grant from the US Department of Energy.

The past year has seen NVX focused on preparing to scale up its synthetic graphite anode operation to fill the gap in the US supply chain and meet the building demand with the transition to electric vehicles. Management is also in what it describes as ‘advanced’ conversations with Samsung and Panasonic as they look to secure their own supply chains. NVX started taking off in June last year when it was noticed by the US government after showing it was a credible non-Chinese supplier of synthetic graphite anode material and a possible groundbreaker in cathode technology. Graphite is the largest mineral component in lithium and nickel batteries. China’s volatility on the trade front helping drive US interest as well as a desire to end its reliance on Chinese production of critical metals. Excitement also flowed from its work on single-crystal cathode materials that are essential in producing longer life batteries. NVX has ambitions to grow anode materials volumes to 150kt per year by 2030 and estimates North American graphite anode demand will hit 871kt in 2030 with cathode demand at 1302kt. Anode demand at 70kt in 2021 with cathode demand at 104kt The most desirable anode-cathode material combinations are those that result in lightweight cells with high voltage and capacity, which is what NVX is working to maximise. For those who can’t remember their high school chemistry, the anode is the negative or reducing electrode that releases electrons, the cathode is the positive or oxidizing electrode that acquires electrons. Main observations:

• The stock box is a bit irrelevant given the lack of fundamentals.
• Obvious from first glance it is a growth company. ROE of -9.2% is expected to reach 11.3% in FY24.
• Revenue is expected to grow almost 50% this year after a 23% improvement in FY21 and a 121% improvement in FY20 although it is from a very low base.
• EPS is expected to fall 43% this year then pick back up 150% in FY23.
• It trades on a PE of -153.3x as it is yet to make a dollar of profit.
• No dividend.
• It is trading at a 25.7% premium to the average broker target price.
• Its peer, Ecograf (EGR) sits on a market cap of $300m with even fewer fundamentals.

What sort of investment is NVX? NVX has no earnings, it made a $18m loss last year. Not expected to turn a profit until FY23. It is a growth company tied to the EV revolution with aggressive exposure to the battery theme with an emphasis on graphite. A tricky one to value as Henry cautioned. A lot of circumspect shareholders at the moment given the unexplained 34% drop at the start of December. Very announcement driven. Announcements, not cash flows are driving the share price. Technical view NVX following its inclusion to the ASX 300 index in September cemented itself as the best performer up almost 750% over the year to December 13. The recent share price performance hasn’t been so impressive, down more than 25% in the last two weeks. An unexplained more than 30% fall on Friday, December 3 the culprit. The fall took RSI back from overbought territory. The MACD forest slipped below the ‘signal’ line which is typically interpreted as a bearish sign. There is some consolidation to use the word loosely around the 900c level. Broker Stuff Morgans the only major broker covering NVX. Hold recommendation with a 732c price target, implying 16.9% downside. The recommendation is a little dated, from November 1 following Q1 results. Morgans observed the initial Samsung 500t contract which was announced in December 2019 was close to completion. On that basis, it removed a risk discount from its model for the anode material business. Added a lot of growth and potential are already priced in. Top investors Phillips 66 took the top spot back in September with a 16.11% stake for US$150m. On the institutional front, Vanguard Australia has a 0.84% holding, iShares MSCI EAFE Small-Cap ETF has a 0.26% position. Management Former DowDuPont executive chairman Andrew Liveris and former US Atlantic fleet commander in chief Robert Natter provide the board with some clout. John ‘Chris’ Burns and Robert Natter apparently have been weighing in on critical materials legalisation in the US. Shorting Short interest is relatively benign although the trend is something to draw attention to, up from 0.04% in September to 0.96%. The big jump at the end of November following the AGM. The ‘please explain’ letter from the ASX surprisingly had little influence on short interest. Conclusion The near-term picture doesn’t offer that much of a compelling reason to get involved. Safe to say it is volatile, an unexplained 34% fall should be a bit of a red flag. The move has taken some of the froth off the top which is putting it back in the focus of ‘bargain hunters’. Unclear if it is a bargain at current levels given the eye-watering valuation at 723x revenue. Its inclusion into the ASX 200 drawing focus as well. A profit isn’t expected to be achieved for a few years so it will be incredibly announcement driven. Higher rates on the horizon another consideration. Deals with EV and tech companies to shore up supply chains likely to drive performance but that will come in dribs and drabs. Favourable legislative outcomes from the US are another possible tailwind. A period of share price consolidation around the 900c level, progress on its production capacity and a deal or two would make it look more appealing. Management is experienced and looks like it has some leverage in Washington. Demand for its products are expected to gain momentum but until there are more cash flows, it is hard to value. No obvious reason to sell if you have decided to hold. HOLD.