TSLA - Time To Charge Up With ChargePoint?

2023-04-28 08:00:40 ET

Summary

• The EV industry has seen continued growth and there will be some winners come out of the industry.
• ChargePoint Holdings, Inc. operates the largest charging network in the US.
• It operates under a different business model than the competition. It provides Software-as-a-Service for the EV space rather than selling electricity to the end user.

The EV market continues to grow. We can debate the semantics of this growth. The fact is that the EV market is growing and with that growth there can be opportunities. The first place to look at is the actual makers of EVs. I don't want to focus on that in this article. There can be a nice lengthy analysis on auto manufacturers, but that is not for today. I wanted to look at some of the other potential winners from the growing market. It is frequent that businesses who provide services to a growing market can be some of the real winners. An obvious business for the EV market is charging stations. This is a market that has to grow if the EV market is to grow. ChargePoint Holdings, Inc. (CHPT) has the most charging stations throughout the country. It also has a different strategy than many of the other EV charging station companies. I reviewed through the company to see if it is a buy or not.

ChargePoint Difference

ChargePoint is different from the other EV charging station companies. The company calls itself the "leading electric vehicle charging technology solutions provider". What makes its business different is that it does not sell electricity. From its 10-K, "ChargePoint sells networked charging hardware, connected through cloud-based software services ("Cloud" or "Cloud Services") and supported by extended parts and labor warranty solutions ("Assure") ....ChargePoint does not sell networked charging hardware without its software, typically does not own or operate EV charging assets, does not monetize drivers, and does not rely upon profits from the sale of electricity."

It sells the hardware to the site owner and lets them determine the price that it will charge for electricity. ChargePoint makes its money from the sale of the hardware and from the software subscription fee. The subscription software provides the following functions: station and site host management, host pricing and payment remittance capabilities, energy management, driver management tools, and integration with route planning for system fleets. Its revenues are closer to a software as a service company than a charging station company. That is how it has intended its business to operate as well. That being said the majority of its revenues still come from the sale of the hardware. I think it is interestingly similar to some other companies I have previously looked at in Peloton and GoPro. These companies both sell hardware at a lower margin and recoup the costs through higher margin software subscriptions. I do think that ChargePoint has a much longer lifetime value than either of those products. You might switch out a GoPro every few years, ChargePoint will have its charging stations around for a much longer time period.

This business strategy is much less capital intensive. They do not bear the cost of building out the charging stations and hold that cost on the books. They sell it for a gross profit. This does also mean they do not get the continued revenue from the charging fees and hinders future revenue streams. They are deciding to forgo that revenue stream from the investment and put their money elsewhere. I see this as potentially good and bad. They do get a subscription fee tied to the hardware though, as they do not sell hardware without the subscription tied to it. This is where the profits will come from for the company. This strategy should also provide the company a path to profitability much faster than some of the other EV charging station competitors. Those companies must continue to spend money on charging stations and they will recoup the money over time through selling electricity.

ChargePoint has also put more focus on level 2 AC ports for charging. These charging stations provide a much slower charge but the company estimates that the fast charging level 3 DC ports are 10 times as expensive to purchase and install. The DC rapid chargers are used for long road trips when you need to get more mileage quickly. AC charging is your more common local charging. These are placed at businesses, homes, retailers, etc. Whenever you are planning to be plugged in a few hours or more then these provide a good charging option. So while the company has the most charging stations throughout the country it does not have as many DC chargers as many competitors. This is up to the station owner as they buy the equipment and bear the cost for the electricity.

Competition

There is a lot of competition for EV charging. There are a lot of startups in the space as well as larger established companies entering the space. Partnerships are becoming a key part of this as well. Partnering with businesses as well as with car manufacturers has started to come into play. There are also a large number of small operators in the market. Overall the market is very fragmented. I feel there will have to be consolidation going forward in order for any company to be successful in the space. It can become very confusing and difficult to charge your electric car. You don't want to have to have multiple different apps and accounts with different providers in order to charge at their station, or at least get the max benefits of charging with them. I can't imagine having to have an account with every gas station that I want to use. I get it that there are credit cards and other things to encourage people to come back and get perks. This is not quite to the same level as with charging networks. You need it to tell you where the next charger is and plan out your route. When the different charging stations are on different networks this becomes difficult to do. That is why Tesla ( TSLA ) has built out the largest network for its users. You need to be able to find a charger and don't want to have to pull up three different apps to find the best route.

Some companies such as Ford have started partnering with different charging networks to combine them under one roof. Through its BlueOval Charging Network you can find charging stations from different companies that have partnered with the company. It is currently working with Electrify America and Greenlots (now Shell). This can be pulled up on the FordPass app on your phone or through your dashboard on your vehicle. You can plan a route and charging stations along the way and pay for it directly through the same app. This is in essence what Tesla has done with its Super Charger Network. GM has done something similar partnering with EVgo Inc (EVGO). This is the only way that I see the charging network working for EV cars. There needs to be consolidated apps that can route you to a variety of different companies charging stations and be used at any of them in order to charge. Either that or the charging companies get to a scale that their charging stations are available to drivers all over. That could come through consolidation as well.

This is where it gets interesting for ChargePoint. They do not own their own charging stations and do not sell the electricity. So they can partner with companies such as Ford or GM to integrate with their vehicles, but their profits are limited since they don't sell the electricity and they are not getting any more subscription fee than they already were from the owner of the charging station. That being said, they must innovate and be available to as many customers as possible or location owners will not be interested in installing their systems. They have formed partnerships with some other charging networks but these networks will not necessarily be paying the subscription fee each month so there is no revenue for ChargePoint. They also stated the following on the conference call, " ChargePoint now has over a dozen automotive partnerships where ChargePoint's cloud services aggregates access to all major public charging networks in Europe and North America via the OEM's in-dash system or companion app". I am just not sure what kind of revenue they will be generating from this. Not sure if the OEM's are paying for this service or if once again this is just a way for them to become competitive in order to gain more locations and therefore more subscription fees. It does show the importance of aggregation and partnerships within the charging network. The networks have to become more consolidated in order for it to work.

The last part of the competition is that ChargePoint is not able to rest on its laurels. With the high level of competition there is always going to be a new, affordable, higher end charger coming out. ChargePoint has to continue to innovate or a location might not be willing to include their chargers but would rather go with a competitor. This can be seen in the high R&D expense that the company incurs. It is a matter if ChargePoint can scale enough to pay for these costs that are likely to continue.

Financial Review

The company is operating at a loss. This is understandable for a company with their business model. They need to grow their subscriptions to a certain scale before they will become profitable. The investment comes up front and then once you hit scale, the profits can start to flow. After reviewing the financials for ChargePoint I am a little concerned about when that point will come. The company is a long way from profitability and has a lot of competition in reaching that status.

The company grew revenues at a very high rate. This is the biggest positive on the financial side. The revenues grew at a rate of 94% from prior year. Not too bad at all I would say.

The company unfortunately saw COGS grow at a faster rate than revenues, meaning the company had a worse gross margin.

The gross margin for the Subscription business is much higher than the Network Charging Systems. Although I would expect the margin to be higher for the subscription business. It actually saw a GM decline from prior year. It is not uncommon to see gross margins for a software as a service business to be closer to 80%. The Network Charging Systems also grew at a faster rate than the subscriptions so it will pull down the overall GM a bit as well. Overall it was a strong growth year. The company stated that some of the margins were compressed due to supply chain issues that should be resolved. So the hope would be to see the GM climb back up.

The company is profitable on a gross margin basis but has large losses from operating expenses. The company has seen its operating expenses grow at a lower rate than revenues. This is important for the company to reach profitability. As the company scales it needs the operating revenues to become a smaller percentage of total revenues. We can see this occurring with ChargePoint but it still has a long way to go to get near profitability.

You can see the declining percentage of operating expenses to revenues. That being said, the operating expenses were still 91% of revenues. That means the company would have to have an insane gross margin to be profitable. Or it will have to continue to grow revenues while not growing operating expenses.

My concern with the financials is that they need a lot to go right and for quite a few years to become profitable. Even if the company were to grow revenues at 80%, 70%, 60% and 50% over the next four years (they have projected 50% for Q1), increase GM back to 20%, and also not have any increase in operating expenses (not realistically going to happen) then it would still not be profitable until 2025. Even a small increase in operating expenses pushes this back another year. These are not necessarily my full projections; they are more of a high level estimate to see what a road to profitability would look like. I do think revenues will continue to grow at a slightly slower rate. Gross margins will continue to see a lot of pressure with competition. The company really needs to keep its operating expenses under control.

The company needs to continue to see a lot of growth but it also needs to see large improvements on the GM side of the business. It is still early in the growth stages but the company really needs to find a way to increase its profitability.

Risks

The company is in a fast growing industry. It is also a very competitive industry. There is a lot of potential for margins to compress and market share be taken due to competitors. The company has a long way to go in order to get to profitability. It needs to continue to grow at an extremely high rate and also increase its margin in the process.

In order for it to grow it needs the EV market as a whole to continue to grow as well. This in and of itself could be a continued risk. Much of this growth is being driven by government incentives and or mandates. This can be a topic in and of itself but not going into this today. In my opinion I strongly oppose government mandating or providing tax credits for purchases. The markets should decide the winners in technology not government policy. Government policy often picks the wrong winners and losers in a market (remember the whole ethanol craze that was not grounded in logic). This is a risk though because you never know what the next administration will decide to do. Much of this is not going through congress but being pushed through the EPA. The next leader of the EPA can roll these policies back without any voting or discussion. It can be fickle to rely on the government for almost anything, so I consider this a risk to the whole industry.

The growth is good to see for the company but there are a lot of risks when you are looking at an unprofitable company that has operating expenses making up 90%+ of revenues. You have to decide if the company can grow into those expenses or not. How long will it take for them to do so as well? The company also does not have enough cash on hand to reach profitability so there will be continued dilution on the part of the company.

Conclusion

ChargePoint operates the most charging stations throughout the US. It has seen really strong growth over the past year. It is still a young company in a growing industry. There will have to be continued growth within the charging station space for EVs to be fully adopted. It has taken a different approach from many of the competitors by not selling the electricity but rather offering software as a service. Although this approach should allow it to be less capital intensive and profitable faster, it is still seeing large losses. Even with great execution this is not expected to be profitable until 2025. If things do not go as smoothly as planned then this could easily be pushed out even further. The company also does not have enough cash on hand to reach profitability. It continues to dilute shareholders and will have to dilute further in the next few years.

I like the growth in the industry. I like the growth in ChargePoint. I just don't like its financials and price point at the moment. The company could continue to be the market leader in the charging station market and become very profitable in the long term. I am concerned about the steps to get there. It is a long road and a lot can happen between now and then. At this point I am not convinced enough that ChargePoint will make it happen to justify its current market value. I will sit on the sidelines on this one. It is worth keeping an eye on as the industry and company continue to grow.

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