CHPT - ChargePoint: The Leading 'Shovel Seller' In The EV Charging Gold Rush

2023-07-27 12:41:26 ET

Summary

• ChargePoint is a leading EV charging technology solutions provider, strategically positioned to act as an enabler in the rapidly growing EV charging market.
• Despite robust growth prospects, there are concerns about the company's balance sheet, cash position, and negative cash flow, with potential additional financing expected in the short term.
• The company's investment prospects appear attractive, but investors are advised to approach in phases due to potential liquidity issues and the expectation of negative cash flow.

ChargePoint ( CHPT ) is the leading EV charging technology solutions provider and the largest AC charging network in the US. The company segments its customers into Commercial, Fleet, and Residential categories, offering them the option to purchase charging station ownership along with rights to operate rather than operating by the company itself, bundled with software subscriptions that generate recurring income.

Investment thesis

This is a favorable business model as CHPT is strategically positioned to act as an enabler in the rapidly growing and expanding EV charging market, akin to the shovel sellers in the gold rush story. This positioning allows the company to avoid direct competition not only with charging station operators but also with EV brands that are establishing their own charging networks - which is comprised of all of the charging stations under the each company's brands.

While the stock receives a "Buy" rating due to its significant potential, investors should be cautious about the position sizing considering the short-term risks associated with the company.

Strategic approach in a growing EV industry

Analysts seem to commonly favor CHPT because of its existing scale of charging network. Indeed, the company has the largest overall size of charging network comparing its industry peers, as shown below. However, it is important to recognize that CHPT's strengths go beyond mere size; the company excels in executing its strategic vision as well, in my view.

CHPT operates under a capital-light model, strategically avoiding ownership of charging piles. Instead, it primarily sells charging infrastructure to operators while offering management and operation services to generate revenue. For example, in March 2022, it cooperated with Goldman Sachs Renewable Energy to launch a one-stop financial plan for pile purchase, station construction, and operation. Additionally, CHPT leverages outsourced suppliers and distributors, granting the company greater production flexibility and operational efficiency.

I believe this approach gives CHPT a significant competitive advantage, as the company is not directly competing with its industry peers for the same target customers. The company, by selling charging station infrastructure, is rather like the enabler of the expansion of other EV charging network in the country than an operator. As EV charging demands surge and infrastructure remains insufficient , CHPT stands as the provider of essential "shovels" for numerous "gold diggers," especially commercial customers seeking to capitalize on the country's increasing EV penetration. Notably, the Commercial segment generally yields higher profit margins than the Residential segment, as indicated by the company's report .

With this, although the company’s share price, alongside its peers’ like EVGO, was affected by the broadening adoption of Tesla's ( TSLA) charging standard, I believe that the market is wrong this time – If the customers want Tesla fast-charging, CHPT will offer NACS , which is the charging standard of Tesla, as an option for its charging solutions. It's essential to consider that charging stations lack significant brand loyalty, making reliability and service standards the key differentiators. This means CHPT primarily competes with Tesla and other competitors in terms of coverage and services, both areas where CHPT enjoys a significant head start by having a larger network size (i.e., more stations available).

Strong P&L but balance sheet is not flawless

The growth prospects for this company are robust, with high double-digit growth anticipated. However, there are notable concerns surrounding the health of its balance sheet, cash position, and negative cash flow. It's worth noting that additional financing can be expected in the short-term to address these challenges.

Profitability: Topline will remain solid, but margin is not easy to improve

CHPT has demonstrated impressive near 100% growth in the past year and is expected to maintain a high double-digit growth rate for several more years. This is because different catalysts for the company’s growth are expected to continue, like national subsidies and its intended electric truck market. Despite this strong growth, the company has faced challenges in maintaining a high profit margin, primarily attributed to outsourced manufacturing and disruptions in the global supply chain.

Looking ahead, the company is likely to face increasing expenses as it operates in a more competitive market that demands continuous innovations and effective marketing strategies. As a result, near-term profitability is not anticipated, and our projection suggests that it may be achievable by the year 2027.

Liquidity: Potential financing expected

CHPT's liquidity ratio is comparable to that of its listed industry peers. However, the company maintains higher inventory levels compared to its peers due to the unique business model it operates under.

The current cash situation is a particular area of concern for CHPT. Following the issuance of the convertible note, the Cash-to-Debt ratio stands at 1. In the short-term, before CHPT achieves cash-flow positivity, it is probable that the firm will need to consider options such as issuing more debt or utilizing its at-the-market offering facility. These actions, while serving the company's financial needs, may further lower the cash-to-debt ratio.

Investment risks

Despite the optimistic industry outlook and CHPT’s leadership in the market, the company does not operate without competitions and risks. Here are some systematic and idiosyncratic risks that will affect the company and its financial as well as share performance:

• The main EV charging gaps remain unaddressed in “on-the-go” market, which requires fast charging capability to quickly allow drivers to go. However, CHPT believes that the charging is most efficient when the cars are “dwelling”, which is during nighttime. Therefore, chargers of CHPT are concentrated in AC charging which might limit the companies’ expansion

• New EV charging options, like PLUG who plans to use hydrogen for EV charging, and alternative fuels, like E-Fuel in Europe, would be competitors to CHPT. There are arguments that EV is not as clean as it sounds, triggering debate in the wide adoption of EV.
• With regards to the company’s financials, there are below investment merits and risks:

Investment Comments: Buy with short-term strategy

The investment prospect in CHPT appears to be attractive, with the potential for significant upsides. According to the base case scenario in our own financial model, the target price is estimated to be around $12 - 14. The target price is calculated based on the revenue projection (as shown in the previous section), cash flow forecast, as well as using a 5.0 - 5.5% cost of capital that is in alignment with the company's situation.

However, it is crucial to acknowledge that the company's cash flow is expected to remain negative until 2027, and there may be liquidity issues in the interim. Therefore, it is advised to approach the investment in several phases, carefully monitoring key de-risk events within the company. For instance, consider investing when the cash flow situation improves, or when the company secures financing that won't substantially dilute equity or increase financing costs. By adopting this approach, investors can mitigate risks and make informed decisions based on the company's progress and financial stability at each phase.

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