CHPT - ChargePoint Holdings: Market Headwinds Make A Buy Difficult Now

2023-08-07 06:44:39 ET

Summary

• ChargePoint Holdings has a strong position in the EV charging market, which is seen as more profitable than the EV car market.
• The company offers a comprehensive range of hardware, software, and services for electric vehicle charging.
• While CHPT has shown positive growth in revenues and gross margins, its share price has declined, and competition from Tesla poses a risk.

Investment Rundown

EV companies have been on many people's minds and still are as the transition to more emission-friendly vehicles is accelerating. But investing solely in EV cars seems quite difficult given that the market for automobiles has generally been characterized as a very low-margin business. That doesn't necessarily seem to be the case for EV charging instead, a market that ChargePoint Holdings ( CHPT ) has a strong position in and seemingly maintaining rather well too.

There is still some way to go until we see the bottom line being positive and that sort of suppresses any buy case for the company. There are still some uncertainties in there that I think need to be addressed before I could be rating CHPT a buy. They have a significant portion of the charging market in the US and are also expanding into Europe. But the challenge now arises to adjust the operators and ensure a positive net income constantly. For the moment CHPT is a hold.

Company Segments

CHPT operates as a prominent player in the realm of electric vehicle charging networks and solutions, both within the United States and on an international scale. The company's core focus revolves around furnishing a comprehensive range of hardware, software, and service offerings tailored to cater to the diverse needs of commercial, fleet, and residential customers engaged in the electric mobility landscape.

As the adoption of electric vehicles continues to gather momentum, CHPT occupies a pivotal position by providing a suite of solutions that addresses the critical need for efficient and accessible charging infrastructure. The company's portfolio encompasses a spectrum of offerings, including cutting-edge charging hardware, sophisticated software platforms, and services that together contribute to the seamless and widespread integration of electric vehicles into modern transportation systems.

The revenues for CHPT are quite diversified more so over the years as CHPT seeks to have more recurring revenues sources like subscriptions. That does, however, create some potentially volatile earnings reports as the subscriptions are set and CHPT takes on the cost of electricity prices. In cheap quarters CHPT makes far more earnings here than in more expensive quarters, like during the colder months of the year.

In terms of geography, they make the vast majority of revenues from North America but are moving into Europe too. Where you have some worry is the fact that Tesla ( TSLA ) is taking more and more market share, not only in the US but also in less competitive markets like Europe.

Recognizing the dynamics of the electric vehicle charging landscape underscores the importance of reliability and service standards as primary factors driving differentiation. In this context, it's noteworthy that charging stations don't often command substantial brand loyalty, shifting the focus towards providing seamless experiences and top-notch service. Within this competitive arena, CHPT finds itself engaged in a rivalry that prominently features Tesla and other industry contenders. In terms of coverage and services, CHPT is well-positioned with a substantial lead, as a result of its expansive and well-established network.

Earnings Highlights

From the last report by CHPT, there are some notable positives to look at. The first being the gross margins made steady improvements to reach 23% during the Q1 FY2024. Revenues came in at $130 million, showcasing a 59% YoY growth which was largely driven by the strong performance of the networked charging systems, growing at 65% YoY. This is making CHPT out to be quite the growth company right now but hasn't resulted in the share price showing the same positive growth. Rather, the share price for CHPT is down 49% in the last 12 months.

For CHPT one of the most important thing to watch is the development of the margins. If they continue trending upwards like this I think more and more investors are going to be interested in the possibility of starting a position. But we need to show improvements on the bottom line margins. The TTM net margin of CHPT is negative 64%. The outlook for the company is quite optimistic as by 2026 the EPS will be positive. That would still put CHPT at a p/e of 67 so I don't think we will see any significant growth in the share price in the coming years, as eventually, the price needs to reflect the actual performance of the business. But the long-term remains strong as EV adoption is likely to stop and slow down significantly. Small bumps along the road should be expected but CHPT continues to seem like a long-term winner.

Risks

While I hold a conviction that CHPT could be a decent long-term stock, it's crucial to acknowledge the associated risks. Notably, the stock's elevated short interest introduces the possibility of a short squeeze fueled by unexpected positive developments. Engaging in a short position inherently carries risks, but implementing a strategic stop-loss mechanism can serve to temper these risks to some extent. But looking at the market environment there seems to be some notable headwinds for CHPT going forward too.

CHPT has undeniably established an impressive network, boasting an expansive count of 31,000 charging points spread across the United States. However, an important consideration is that a significant portion of the company's network is built on AC ports, which have witnessed a decline in desirability in recent times. The transition towards the adoption of DC ports, which are generally more efficient, has presented a challenge. While CHPT is actively involved in enhancing its portfolio with DC port investments, it's worth noting that Tesla's recent deals have had a notable impact on a substantial portion of CHPT's target market.

The competitive landscape, especially with the likes of Tesla, introduces an element of uncertainty in CHPT's market positioning. Tesla's advancements in charging technology and strategic alliances could potentially encroach on CHPT's market share. This dynamic underscores the importance of considering how CHPT will navigate competition, adapt to changing consumer preferences, and innovate to maintain its relevance in the rapidly evolving electric vehicle charging market.

Final Words

Investing in EV charging doesn't leave a lot of options. CHPT has grown to a quite dominant position but continues to face competition from Tesla which has far more capital to deploy into this market than CHPT has. Solid operational performance is necessary to maintain its position but it seems it won't be enough to make the EPS positive anytime soon. I still like the long-term outlook and will have CHPT on a hold for now.

For further details see: