CHPT - ChargePoint: Limited Hope Of A Turnaround

2023-12-21 11:11:39 ET

Summary

• ChargePoint is struggling to turn a profit and has been diluting shareholders to fund ongoing losses.
• The EV charging station network company has reported collapsing revenues due to slowing EV demand while key subscription revenues aren't material enough to drive the business.
• The stock has a $1 billion valuation and justifying a higher price isn't logical.

The whole EV charging station network business model appeared flawed from the start. ChargePoint Holdings ( CHPT ) was the leader in the group at one point, and now the company keeps diluting shareholders in order to fund ongoing massive losses. My investment thesis remains Neutral on the stock, with limited hope the business model turns profitable anytime soon.

Slashing Expectations

ChargePoint entered the year expecting quarterly revenues to zoom past $200 million this FY. Instead, the company reported FQ3 revenues of just $110 million , missing original estimates by up to $55 million, and not guiding for FQ4.

Not only has the EV charging station company quit reporting miraculous growth, but also the company is now actually reporting sequential and YoY revenue declines. The stock has been crushed due to the major issue with a company reporting large losses is the lack of a margin of safety when something goes wrong.

The issue all along has been that the majority of the revenues were for low margin charging station products and limited revenues from mid-margin software and services. ChargePoint was stuck in a losing war of trying to install a large amount of money losing charging stations to add software and services for the long term, and now EV demand has slowed materially.

The good news is that subscription revenues jumped 41% to over $30 million in the quarter, but the costs jumped as well. ChargePoint is only generating slightly above $10 million in gross profits from Subscriptions, though the gross margin did jump to 35%.

A prime example of the lingering issue with the business model is that charging network utilization increased dramatically during the quarter. ChargePoint saw energy dispersed jump 18% sequentially to 304 gigawatt hours, with the amount surging 70% YoY, all while the company reported lower revenue in the quarter. The company is not necessarily tied into the economics of the demand for charging vehicles.

Naturally, the problem is that non-GAAP operating expenses are up at $81 million. The new CEO is making some positive steps to focus on charger quality and to improve supplier costs, but the business remains tough.

In essence, ChargePoint has ~$10 million in solid gross margins related to subscriptions and quarterly expenses in the $81 million range. The Networked charging products will provide some positive gross margins in the future, but the EV charging station company is still far from being profitable.

Major Dilution Hit

The company improved the balance sheet during the last quarter, but shareholders saw major dilution in the process. ChargePoint now has a cash balance of $397 million, which includes $233 million of at-the-market share offering gross proceeds during FQ3 prior to issuing a major warning for the quarter.

ChargePoint only had 360 million shares outstanding at the end of the last quarter. The company already has 418 million shares outstanding and probably rushed to raise the $233 million in last quarter, selling shares at $4.37. The institutional investors probably have big questions about the timing of the capital raise in early October and the big warning in November.

New CEO Mansi Khetani, former COO, reaffirmed plans to achieve positive adjusted EBITDA in FQ4 of calendar year 2024 (FY25). ChargePoint still reported a $55 million loss in FQ4, and one really has to wonder how such lower margins get the charging network business to EBITDA breakeven in FY25, which is only the 5th quarter from now.

Even on the stock dip, ChargePoint still has a market cap of $1 billion. The company only has annualized Subscription revenues in the $120 million range, and under the best case scenario, the company isn't anywhere close to being profitable.

The market has long tried to assign a market cap based on growth in charging equipment products with limited gross profits. The failure here was assigning values based on top line sales and not a profit metric, whether related to gross profits or adjusted EBITDA.

ChargePoint needs to generate ~$200 million in quarterly revenues with a forecasted 40% gross margin to achieve just breakeven adjusted EBITDA on $81 million in operating expenses. In essence, the company has to nearly double revenues while keeping expenses flat and finally growing the gross margin to hit this breakeven target. Analysts do not forecast the company comes anywhere close to $200 million in quarterly revenues until maybe the end of FY26.

Takeaway

The key investor takeaway is that ChargePoint still has no appeal on this dip. The stock might not fall further from here during a bull market in 2024, but shareholders shouldn't expect any upside until dramatic changes in the business model occur, and this must happen while EV demand is failing to meet lofty expectations.

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