CHPT - ChargePoint's Peril: EV Headwinds Threaten Its Market Grip

2023-11-08 12:03:27 ET

Summary

• ChargePoint's stock has plummeted over 94% from its highs, but recent news of Tesla-compatible charging stations has sparked optimism among analysts.
• ChargePoint dominates the EV charging market, but faces competition from EVGo, Electrify America, and the looming threat of Tesla's supercharger network.
• The future success of ChargePoint is dependent on the state of the EV industry, which is currently facing concerns of a demand slowdown, impacting the company's stock price and future earnings. Additionally, ChargePoint's financials show shrinking margins and poor performance.

Thesis

ChargePoint (CHPT) is an American electric vehicle infrastructure firm that is based out of Campbell, California. Over its lifetime, it posted highs of around $46 per share, now dipping over 94% to its current price of $2.50 per share. Recently, the firm announced that they were rolling out an array of Tesla-compatible charging stations, news that seems to have galvanized an already bullish group of analysts who see strong gains in CHPT’s future. In my opinion, due to a combination of EV market trends and shrinking margins, staying away would be advisable.

Company Overview

ChargePoint’s main business stems from the sale of its charging stations to both companies and individuals. Notably, they do not collect revenue from the charge itself; that right is transferred to the purchaser upon receipt. Beyond this, CHPT also offers a cloud-based subscription to their existing systems throughout the United States, allowing consumers to control their charging systems and view user metrics. This can include setting prices, driver access security, and access to over 35 charts and reports pertaining to charging statistics. This offering has variable pricing dependent on time, energy use, charge duration, or driver group required by the consumer. Finally, the firm also makes a small portion of its revenue by performing the maintenance of the stations it sells.

Competition

ChargePoint is extremely dominant in its market share, cornering over 70% . Their main competitors are EVGo and Electrify America, each making up a relatively minor portion of the market. However, there is also a looming threat in the form of Tesla as they open their supercharger network for public use in the summer of 2024. Around one week ago, Tesla reported that they were planning on extending partnerships to the following firms: BMW, Ford, Genesis, General Motors, Honda, Hyundai, Jaguar, Kia, Mini, Nissan, Mercedes-Benz, Polestar, Rivian, Toyota, and Volvo . This news, paired with the fact that “a group of seven major automakers” have recently announced over 30,000 new charging station installations, does not bode well for CHPT. Macroscopically, ChargePoint's dominance should not be understated, but it is facing new pressures, and its ability to navigate these changes will determine its future success in the evolving EV charging market.

EV Market Demand Slowdown

By virtue of ChargePoint’s business being directly tied to the state of the EV industry, it is an extremely relevant factor that investors would be remiss not to consider. The main consumers of CHPT’s products will align their decision to purchase with the expected future volume of electric vehicles. Taking a look at recent actions taken by EV and general automobile behemoths such as Tesla and GM, there is a widespread fear of EV demand slowdown in the near future. The latter recently announced that it will delay production of electric pickup trucks at its plant in Michigan by over a year. The former reflected similar sentiments, with CEO Elon Musk publicly declaring that high interest rates have made the vast majority of EVs unaffordable for the target consumer, something that has been reflected in Tesla’s stock price drop as well as that of other EV firms. The iShares Self-Driving EV and Tech ETF have fallen over 24% in the last three months, firming recent sentiments on current EV demand throughout the market. This does not bode well for the inevitability of CHPT, as these slowdowns will only truly affect the stock price when future revenues are released. While current drops can certainly be attributed to investor wariness about the EV market as a whole, even the most bullish of investors will see heavy losses and have second thoughts when these conditions are reflected in CHPT’s future earnings reports.

Shrinking Margins and Poor Financials

In no uncertain terms, CHPT is floundering financially. Their revenue increases have been outpaced by increases in their COGS or cost of revenue. In order to cover the increases in these costs as well as operating expenses, the firm has been burning through cash at a rapid rate. Taking a look at their 10-Q , the previously referenced trends become clear. From 2022 to 2023, there was a significant 36% jump in revenue, which was outpaced by a 65% increase in cost of revenue. Beyond this, cash and cash equivalents dropped to $233.5 million, around a 30 million decrease from last year's $264.2 million. Below, we can see perhaps the greatest indicator of poor investability, a tremendous decrease in gross margin over the past quarter, likely stemming from the squeeze on EV demand in the market.

Valuation (Discounted Cash Flow Model)

The below valuation highlights some of the concerns discussed previously. Even with liberal estimates for key assumptions such as the growth rate, there appears to be a significant overvaluation of CHPT stock. The discount rate was conceived using the dividend derivative methods and cross-referenced with Simply Wall Street’s estimates . Figures for revenue, net income, and free cash flow were acquired from CHPT’s 10-q. The perpetual growth rate is equal to the 5-Year Average of US Long-Term Govt Bond Rate, in my view providing a fairly accurate assessment of CHPT’s cash flows over the next few years. Their current growth rate is the average of up to 5 public analyst estimates stemming from S&P Global.

Conclusion

All in all, my outlook on ChargePoint is fairly bearish due to poor EV industry forecasts and dipping financials. Unfortunately, the brunt of its success rests on which direction electric vehicle sales project to move. Until a more positive outlook is established, there will be a constant downward trend in CHPT, and even in the case of an upward industry trend, ChargePoint will likely continue to see a decrease until the movement is reflected in its order volume.

For further details see: