CHPT - ChargePoint Holdings: Slow EV Adoption Is A Huge Risk

2023-04-12 10:01:51 ET

Summary

• ChargePoint Holdings, Inc. built a business model on fast electric vehicle adoption, but new research suggests Americans aren't planning fast adoption rates.
• The EV charging station company is set to lose hundreds of millions for the next couple of years based on 50%+ growth, leaving little margin of safety for lower sales.
• ChargePoint Holdings stock is expensive, with a $3.3 billion market cap and no quick path to profits.

The ChargePoint Holdings, Inc. ( CHPT ) investment story has generally assumed electric vehicle ("EV") adoption would occur at a rapid rate. Some research and Tesla, Inc. ( TSLA ) price cuts might suggest this story isn't completely accurate. My investment thesis remains Bearish on the charging station business, especially after a major risk is being added due to questions regarding EV adoption rates in the U.S.

U.S. EV Adoption Struggles

A big part of the story in the EV charging station business for the likes of ChargePoint Holdings, Inc. is the predicted huge ramp in EV adoption. The business model is built on large current losses with a huge assumption that higher EV volumes in future years will lead to much stronger sales and ultimately profits.

The major flaw in such business models is the consequences of when financial targets aren't reached. ChargePoint doesn't have a business supportive of an environment when sales growth isn't explosive.

Unlike other charging station companies, ChargePoint doesn't point out the explosive EV ramp in presentations. Though, the company reported a huge loss for FQ4'23 and all of FY23.

The problem is that the Financial Times reported Americans aren't lining up to buy EVs. The report based on a survey from the AP and the University of Chicago only has 2 in 10 of Americans likely to buy an EV as their next vehicle.

The amazing part of the report is that Democrats are only ~25% very likely to buy an EV. While a lot of public opinion appears to support EVs, most consumers vote with their wallets, and EVs are far too expensive for the average American no matter their ideology.

The survey suggests 8 in 10 people see cost as a reason for not buying an EV, with nearly 60% of people seeing cost as prohibitive. Just as amazing, the study shows the prime motivation to switch to an EV is financially motivated and not to save the climate. Individuals see saving on gas as the main reason to buy an EV, suggesting the $7,500 credit as part of the Inflation Reduction Act isn't luring most people to switch to EVs.

Huge Problem

While more charging station demand will help ChargePoint Holdings, Inc. sales, the Financial Times report suggests range anxiety isn't really the issue holding back EV sales. Besides, the company has plenty of Networked Charging Systems being sold, but they don't have enough usage and subscriptions.

Even worse, ChargePoint is focused on global diversification, but the company has the vast majority of revenues from North America. For FQ4, North America sales were ~86% of the $153 million in revenues reported during the quarter.

ChargePoint Holdings, Inc. guided to 56% sales growth in FQ1'24 ending in April, but the company just lost $236 million last year. The amount even excludes stock-based compensation which works to also dilute shareholders while the business is burning cash at a crazy rate.

Analysts currently forecast a $0.47 EPS loss for the current fiscal year which amounts to a nearly $175 million loss on 348 million shares outstanding as of January 31. ChargePoint has a cash balance of $400 million, but outstanding debt amounts to nearly $300 million leaving limited net cash heading into another year of large losses.

Analysts forecast sales growing at an incredible 51% clip in order to generate those loss levels. The charging station company is forecast to deliver another year of 50%+ growth in FY25 (ending Jan,) in order to cut the losses.

Investors need to consider what could go wrong if EV demand doesn't live up to hype. ChargePoint is forecast to report combined losses over the next 2 years of up to $300 million, and a scenario where revenues don't hit targets would be crushing to the already weak bottom line.

Remember, the problem with ChargePoint is that the company has limited gross margins on equipment sales. The company is focused on higher margin software and subscription sales once a fleet operator or a person starts using the charging network.

ChargePoint only has $26 million in quarterly Subscription revenues with gross profits of just $12 million. The company spent $111 million on operating expenses in FQ4'23 alone, requiring just massive sales growth in this area to ever cut the larger losses.

Our view is that ChargePoint is going to struggle hitting aggressive financial targets in the next couple of years leaving a massive hole in the business plan. The only way to eliminate the large losses will be cutting costs, and companies rarely cut their way into strength, with the strongest employees leaving and business momentum dying in such scenarios.

Takeaway

The key investor takeaway is that investors should avoid ChargePoint Holdings, Inc. stock based on projected weak financials over the next couple of years in what appears a best-case scenario. What should really concern people is a worse case scenario where EV sales don't meet aggressive growth targets and the EV charging station company is left with a large hole in the business model, leading to significant ChargePoint Holdings, Inc. stock downside.

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