Cowen is increasingly optimistic about the investment potential of companies focused on lithium-ion batteries. “Lithium-ion batteries are the cornerstone of several major themes – namely ‘Electrification of Everything’ – and given their importance, we believe that as the industry becomes more ‘mainstream’, energy, tech and automotive/industrial investors will all need to pay close attention (ie, less about incumbents in Asia),” analyst Gabe Daoud wrote in a 124-page report. Cowen expects lithium-ion rechargeable batteries to grow at a compound annual growth rate of 21% through 2035 from a base in 2021. This brings the total potential addressable market to $366 billion. The most well-known application of these batteries is in electric vehicles. But batteries are also used in smartphones, laptops and smartwatches, as well as alternative and virtual reality hardware such as headsets. Recent geopolitical conflicts, including Russia’s invasion of Ukraine, have boosted U.S. demand for battery production, Daoud said. However, despite new support for the Infrastructure Investment and Jobs Act and the Reducing Inflation Act, supply challenges remain. Ultimately, Daoud said, the U.S. lithium-ion battery industry is set to benefit, especially if the headwinds subside and production catches up with demand. The lack of integration and commercialization has created opportunities for small start-ups, he said. “While we’ve learned with the help of countless conversations with experts that there’s no ‘holy grail’ for batteries, many startups do appear to be well-positioned to gain share, given that compelling technology and/or manufacturing improvements can reduce costs.” The report initiated research coverage of three stocks and repeated top picks, Ude said in the report. The top pick is Enovix, which Daoud said has an “attractive” list of potential customers and a “first-class” licensing model for electric vehicles. Rated Outperform, Enovix has a price target of $36, or 94.5% potential upside. Battery swelling has always been an inhibitor of lithium-ion batteries. Daoud said Enovix is the only company to make changes to its batteries to avoid this, by replacing electrodes to relieve the pressure on the silicone to swell. Daoud acknowledged that the lack of earnings from these startups could worry investors, especially against a grim macroeconomic backdrop with the Federal Reserve raising borrowing costs and the S&P 500 down 19% this year. While Envoix is seen as having the most commercial potential, Daoud said he is also looking at FREYR Battery, SES AI and Solid Power. The companies have unique differences, but they will all gain traction as the market expands, he said. Daoud said there are concerns about the acceleration time for these companies, while noting that FREYR may act sooner. “While we appreciate the disruptive approach, we try to balance long-term potential and time-to-market given the investor’s time horizon and prefer ENVX and FREY, QS, SES and SLDP represent long-term options for solid-state/lithium metal technologies,” he said . The report contains preliminary investment opinions on three stocks: FREY (outperform), SES (market performance), and SLDP (market performance). ENVX and QS have been rated as outperformers.