CHPT - ChargePoint: Steer Clear

Summary

• ChargePoint's FQ4 earnings were a massive disappointment, coupled with a catastrophic Q1 outlook that sent shockwaves through the market.
• Management chalked up their abysmal execution to 'special circumstances.'
• Surprisingly, there was no preliminary update on these circumstances - leaving investors in the dark and begging the question, wouldn't an early warning have been more than appreciated?
• Disastrous doesn't even begin to describe it: with a Q1 outlook of only 56%, missing the consensus estimate of over 100% growth, it's clear that things have gone horribly awry.
• Unless you're a die-hard believer in management, steer clear of this sinking ship.

ChargePoint Holdings, Inc.'s ( CHPT ) weak earnings release triggered a significant post-earnings selloff.

The company delivered a stunning miss against its previous Q4 guidance and telegraphed an FQ1 outlook, giving short sellers more fuel to reload their bets.

Down more than 13% post-market, we had previously anticipated that FQ4 could mark an upward inflection point in its gross margin recovery (FQ4's adjusted gross margin: 23% Vs. FQ3's 20%). That proved to be on the mark, but we didn't expect management to deliver such a weak performance on its revenue growth, which investors likely didn't expect.

ChargePoint posted revenue growth of 93.8% YoY in FQ4, reaching $152.8M. However, investors should note that it came well below its previous guidance range of $160M to $170M, attributing it to "special circumstances." CEO Pasquale Romano articulated:

[The miss] was due to a combination of special circumstances. The first is a decrease in North American commercial demand during the month of December; the second, while overall supply chain limitations have eased, they persist for certain hardware products; and lastly, we just missed shipment cutoffs for some customers that caused a larger gap between billings and revenue than historical norms. (ChargePoint FQ4'22 earnings release)

If it was that "special," knowing that the company could under-deliver its execution in FQ4, management could have provided investors with a constructive update pre-earnings. That would have been the wise thing to do, not keep investors in the dark until earnings release.

Moreover, management seems to think that its execution wasn't the problem in response to an analyst's question about whether the company could have met its guidance "if those shipments had gone out in time?" CFO Rex Jackson highlighted:

Yes. I mean that's a good question, right? So first thing I would say is we put a lot of pressure on ourselves from Q3 to Q4, a big uptick, and we accomplished most of it. So we fundamentally just had a back-end linearity issue of getting products either built from a DC standpoint because you ran out of gas on that from a supply chain standpoint and then on the trucks in time at the end of the quarter. So would we have made it -- the short answer is yes. (ChargePoint earnings)

Then, the case for a prelim update makes even more sense now because management needs to manage investors' expectations appropriately. It could have given investors more time to parse a prelim commentary and for analysts to prepare their Q&A with more thoughtfulness, compared to a stunning release that caught likely caught most off guard (except the bears).

If that wasn't enough, ChargePoint informed everyone of its outlook for FQ1'23, indicating revenue growth of 56% at the midpoint of its guidance range.

It was hugely underwhelming guidance because it came well below the consensus estimates of 103.4% YoY growth. Hence, it suggests that analysts missed the mark completely. However, could management have helped to provide more guidance for the analysts in their modeling?

Jackson had this to say in response to a question about the analysts' financial modeling:

I'm chuckling just because I did not say consensus. What I said was, and this is an important distinction, analysts develop their models and then they make judgments based on why I believe this. I think this is going to be better. This is going to be worse and they come to a conclusion, and we use the word dispersion. Last year through no fault of their own because we're a newly public company and who could have modeled us from the outside last year, I wouldn't expect you guys to be able to do that. So the numbers are all over the place. So I felt like we needed to help get it centered. But I think the dialogue we've had with analysts over the last year and people's understanding of the business and their ability to form their own conclusions about what the outlook should be is vastly improved versus last year. (ChargePoint earnings)

We think that's a critical challenge for investors trying to assess the analysts' assumptions and management's guidance for ChargePoint. In addition, as highlighted by management, analysts are still trying to learn how to model ChargePoint's operating performance.

However, the big miss this quarter and next quarter's outlook suggest that the learning process still has a massive gap to cover. Therefore, investors may need to significantly discount the analysts' estimates before applying them to their modeling.

Notwithstanding, the long-term fundamentals in EV charging should remain robust if ChargePoint could leverage. The company has established several partnerships with major automotive players, including Lexus, Mazda, Toyota, Fisker, Volvo, and Mercedes Benz.

Moreover, the company highlighted its confidence that it could turn free cash flow positive by the end of Q4FY24. Therefore, it suggests that the medium-term outlook could improve if ChargePoint's capital-light infrastructure buildout could gain cadence, as EVs are expected to continue gaining share.

Notably, the company highlighted the critical limiting factor is EV share of new car sales and installed base. With that in mind, the secular tailwinds driving EV adoption moving forward should continue to lift ChargePoint's growth momentum.

Moreover, Tesla highlighted that it was " just getting started " in EV charging, suggesting that it could be a significant growth vector to undergird its high-growth valuation. Therefore, it suggests that the EV charging industry is still in its nascent growth stages, as it capitalizes on increasing EV adoption tailwinds.

While we still think CHPT could have bottomed in late December, as highlighted in our previous update, we believe investors should be wary about adding CHPT now.

Given the dispersion between management's outlook and analysts' forecasts, investors' confidence in the guidance and projections will likely be discounted moving forward.

Rating: Hold (Revise from Speculative Buy).

Note: As with our cautious/speculative ratings, investors must consider appropriate risk management strategies, including pre-defined stop-loss/profit-taking targets, within an appropriate risk exposure.

For further details see: