CHPT - ChargePoint's Road To Profitability Just Hit A Major Speedbump

2023-12-01 13:15:00 ET

Summary

• ChargePoint, a leading manufacturer of EV charging stations, faces challenges including leadership change, updated guidance, and a dimming macroeconomic outlook.
• Q2'24 financials showed a slowdown in growth, and the company revised its Q3'24 estimates downward, impacting stock performance.
• The 175mm share issuance forced the firm's $300mm convertible to be restructured on unfavorable terms for CHPT.

ChargePoint ( CHPT ) is one of the leading manufacturers of EV charging stations with over 255,000 active ChargePoint ports under management, 22,00 of which are DC ports, with an additional 530,000 ports accessible via roaming. Their market-leading product is their Level 2 AC chargers that are typically found in homes, in commercial parking lots, and stationed for fleet management. There have been some huge developments that I elaborate on in this report, including leadership change, updated guidance, and a dimming macroeconomic outlook. With these factors, I provide CHPT a SELL recommendation with a price target of $1.26/share.

Operations

ChargePoint generates revenue primarily through the sales of its charging stations along with its subscription and warranty services. The firm also offers its charging stations as a service, in which ChargePoint retains ownership of the charging station and sells the subscription-based services. Its fleet services include each of these features in addition to fleet management software and professional services for the design and support of the stations. Accordingly, ChargePoint earns 54-56% of its revenue per transaction upfront through AC/DC hardware sales and the remainder is recurring revenue in the form of subscription services and warranty services.

Financials

Q2'24 financials showed a slowdown in growth on a TTM basis with Networked Charging Systems and total revenue both slowing to 8% growth. GAAP margins have also shown compression with gross margin falling to 16% off of 20% (net of the $28mm impairment charge, GM was 21%) on a TTM basis for q2'24.

ChargePoint did release preliminary guidance on November 16, 2023, that shocked the stock in a downward trajectory. ChargePoint announced a significant revision to their Q3'24 estimates, dropping revenue guidance from $150-165mm to $108-113mm with gross margins estimated to be as low as -23%.

In addition to this guidance, ChargePoint was put in a position to renegotiate the terms of their $300mm convertible notes in relation to their issuance of $175mm common stock. The terms were unfavorable to ChargePoint in which the cash coupon doubled from 3.50% to 7% and the PIK coupon increased from 5.00% to 8.50%. The conversion price was also reduced from $24.03/share to $12/share or 83.33 shares per $1000.

On top of this, Rick Wilmer is taking over as President and CEO, effective November 16, 2023, replacing Pasquale Romano who had been in the seat since 2011. In addition to this, Rex Jackson, CFO, also took his leave with Mansi Khetani taking his place as interim CFO.

Macro

There have been multiple reports of challenges for the electrified economy. Though much of this doesn't pertain directly to ChargePoint, these challenges directly affect the future of their operations. The Wall Street Journal reported that:

Companies such as battery recycler Li-Cycle Holdings, hydrogen upstart Plug Power and small modular nuclear-reactor firm NuScale Power are delaying or canceling projects because of ballooning construction costs and higher interest rates.

In an October 29, 2023 report by the WSJ , Tesla paused plans for a new factory in Mexico, GM scrapped the company's EV production goals, Honda is cutting their plans to manufacture low-cost EVs with GM, and Ford is postponing their planned $12b EV factory investment.

Valuation

ChargePoint is set to be driving down some challenging roads in the coming year as the macroeconomic landscape changes for the worse. Given management's new guidance and their investor's negative sentiment relating to repricing the convertible bond, there doesn't appear to be much upside for the EV charging space in the near term. Using CHPT's pre-share issuance valuation of 1.24x, I provide CHPT a SELL recommendation with a price target of $1.26/share.

On a tactical basis, CHPT is severely oversold and may experience some upward trends before continuing its downward trajectory. Given that their earnings release will be held on 12/6/23, I recommend holding off until after earnings before placing a short position as the shares may act in a more volatile, erratic form. Liquidity shouldn't be an issue as there are currently 50,000 open contracts on December 15, 2023, puts at $1.50 strike price.

As a disclaimer, shorting shares directly and selling naked call options hold unlimited downside risk potential. The only risk in purchasing puts is the premium to purchase puts. The cost to borrow currently sits at 8.37%, so it might be more optimal to utilize options to short this company.

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