CHPT - ChargePoint: Still Priced For Perfection

2023-05-31 14:30:33 ET

Summary

• ChargePoint Holdings, Inc. is set to report FQ1 2024 earnings on Thursday June 1 post-market.
• The charging station company is forecast to report another large loss at $0.17 per share.
• The key focus is the Subscription revenue growth and the related margins.
• CHPT stock should be sold on all rallies due to the limited gross profits from low calorie revenues.

ChargePoint Holdings, Inc. ( CHPT ) is bouncing heading into FQ1'24 earnings due to a somewhat bullish analyst call . The electric vehicle ("EV") charging station company still has a structurally problematic business model unlikely altered by the upcoming quarterly results. My investment thesis remains Bearish on ChargePoint Holdings stock on the bounce back towards $10.

Catch 22

The whole EV charging station system continues to face a Catch 22 situation, where more charging stations are needed to drive demand for EVs, but the business models only bleed further cash via building new charging stations. Instead of requiring the large auto manufacturers to fund the charging stations at profitable margins, companies like ChargePoint quickly sell charging stations at near breakeven to move the EV concept forward.

The problem is that ChargePoint should've just showed up with their fleet management software systems once the charging station networks were built and fleet demand was ramping up. Instead, the company is eating a lot of losses to fund expansion to an uncertain future.

ChargePoint reported a massive $236 million loss in FY23 , up from $186 million in the prior FY. The company hopes to cut these losses in FY24, but ChargePoint only ended FY23 with key annual subscription revenues at $100 million.

The EV charging station company reports FQ1 results post-market on June 1, with guidance for revenues of $122 to $132 million, up 56% from the same quarter last year. The issue here is that sales are set to dip up to $31 million from the January quarter level of $153 million.

Due to the large fixed operating costs, analysts predict ChargePoint loses $0.17 per share during the quarter, pushing towards some of the largest losses last year. With 348 million shares outstanding, the loss amounts to a massive $59 million.

The primary focus of the quarterly results will be the Subscription revenues. Investors will want to see Subscription revenue continue to grow in a non-seasonal manner with the major revenue hit coming from the Networked charging systems with gross margins of only 16.5%.

What is crucial to understand is that even the Subscription revenues aren't high-margin revenues. The revenue base remains relatively small at just $26 million in the January quarter, while gross margins only ticked up from 41.4% last FQ4 to 45.2% now.

Despite all the promises of EV charging station Subscriptions, ChargePoint only generates just below $13 million in such quarterly gross profits. A company can't generate much value in a business producing just north of $50 million in gross profits when R&D expenses alone are costing $47 million per quarter.

ChargePoint is heavily spending in a manner as if the business produces software like margins in the 80%+ range, yet the key business line only produces ~45% gross margins now. The company has to triple Subscription revenues to $75 million per quarter and boost gross margins to 60% to just cover the R&D costs.

Of course, R&D costs include ~$10 million in stock-based compensation, so the company just needs to hit ~50% gross margins to cover the cash costs.

Remember, though, this is just an example of the wild disconnect with spending at the actual business. Investors should watch for the $20 million in gross profits and 17% gross margins to disappear with the dip in charging station sales. Under the current market dynamics, these gross profits are always at risk from competitive pricing pressures.

Priced For Perfection

Even with ChargePoint falling below $10, the stock still has a market cap at nearly $3.5 billion now. A lot of investors of willingly paid up for the stock due to the total sales figure and growth rates.

The problem here is that the majority of the sales are low calorie. ChargePoint produced $364 million in sales last FY, but only the Subscription revenues at $85 million offer any real value to the business.

Analysts forecast sales reaching $705 million this year, but the numbers appears very aggressive. ChargePoint has to hit $167 million in FQ2 and reach $219 million for FQ4 in order to reach this target.

Under the best case scenario, ChargePoint is forecast to still lose a lot of money with quarterly revenues topping $200 million. Under the worst case scenario, the charging station company fails to reach targets and the losses pile up.

The problem here is that the stock is priced at somewhere over 20x Subscription revenue targets. ChargePoint remains priced for perfection due to investors valuing the stock based on low calorie sales that offer no value.

Takeaway

The key investor takeaway is that ChargePoint Holdings, Inc. shares are still extremely expensive, even with CHPT stock trading below $10. A lot of investors irrationally think the stock is cheap due to falling from highs above $40, while analysts like BoA assign minimal price targets of $14.

Investors should continue using any opportunity to unload ChargePoint Holdings, Inc. stock.

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