2023-07-13 22:03:33 ET
Summary
- EVgo, an operator of electric vehicle charging stations, faces increasing competition and financial losses despite a growing market and government subsidies.
- The company's portfolio includes 2,582 fast-charging DC chargers and 364 slow chargers, with revenues increasing by 229% to $25.3 million over the past 12 months.
- Despite rapid growth, EVgo's operational losses and capital expenditures suggest the company has enough cash to sustain the business for about one year.
[Please note that this is a further report on companies offering electric vehicle charging services. The first was Chargepoint – linked here .]
EVgo (EVGO) ( New York symbol EVgo; Electric Utilities; Shares outstanding: 297.9 million; Market cap: $1.32 billion; www.evgo.com) owns and operates electric vehicle (“EV”) charging stations. The company was founded in 2010 and listed on the $4.43operates in a fast-growing market benefitting from government subsidies and fiscal incentives. In addition, the company has a reasonable share of the fast-charging electric vehicle market in the U.S.
However, financial losses and negative free cash flow are accumulating rapidly, and the balance sheet will continue to need reinforcement. In addition, competition in the U.S. market will be intense over the next few years and the opening of Tesla’s fast-charging network to General Motors and other clients will be particularly negative for EVgo’s future expansion plans. Despite the 80% decline in the share price since early 2021, it is hard to make a case for acceptable returns given the high level of operational risk faced by the business. A take-over bid from a utility or vehicle manufacturer may be the best outcome for EVgo investors.
A hugely unprofitable business but sales are growing fast
EVgo builds and operates charging infrastructure for electric vehicles (“EV”) currently in 30 U.S. states. Clients include retail customers, original equipment manufacturers, and commercial-vehicle and fleet operators.
EVgo’s strategy is to compete in the fast-charging (direct current “DC”) market where the growth is expected to be faster than the overall EV charging market. Although the bulk of EV charging by individuals takes place at home on lower-powered chargers, fast-charging shortens the charging duration which provides an advantage for individuals charging away from home at malls, offices, or on the highways, and for commercial vehicle operators.
The current EVgo portfolio consists of 2,582 fast-charging DC chargers and 364 slow chargers. This compares to the 19,663 fast chargers provided by the DC industry leader, Tesla, and the 3,308 fast chargers provided by Volkswagen-owned Electrify America. ChargePoint has the most deployed chargers in the U.S., namely 30,556 but only 1,983 are fast chargers.
EVgo installs and operates its retail charging stations and sells electricity directly to vehicle owners. Chargers are generally installed at malls, hotels, apartment buildings, and airports.
Commercial customers such as transportation companies or delivery services can access EVgo’s charging services through the public network. Pricing is negotiated between the fleet owner and EVgo.
In addition, EVgo contracts directly with vehicle manufacturers (OEMs”) to provide charging services to drivers that bought their vehicles from these manufacturers. Access for the clients can be through the EVgo’s public charger network or a dedicated infrastructure developed for a specific customer. General Motors is a major OEM customer – under a 2020 agreement, EVgo will provide 3,250 fast chargers over 6 years with GM funding a quarter of the capital cost. We note that GM also recently agreed with Tesla to incorporate the Tesla charging standard into its new electric vehicles starting in 2025. GM vehicle owners will also be allowed to use the Tesla supercharger grid from early 2024. This is clearly going to have a longer-term negative impact on EVgo.
EVgo also offers a program named eXtend where the company provides charging infrastructure and operates and maintains the charging hardware and software. However, customers purchase and retain ownership of the charging assets. In 2022, EVgo contracted with Pilot Travel Centers to develop and maintain up to 2,000 fast-charging stalls that Pilot will own.
The company is still in its build-up phase, but revenues are growing quickly. Over the past 12 months to the end of March, the total revenue increased by 229% to $25.3 million with substantial increases in all main revenue categories.
Sky-high growth expectations but competition is heating up
[Please note that this section provides a summary of a wider industry landscape assessment available in our previously published report on Chargepoint linked above.]
- Industry estimates indicate that global electric vehicle (“EV”) sales in 2022 amounted to 10 million, or 14% of all car sales in that year. Spending on EVs was up by 50% in 2022 and light commercial electric vehicle sales also jumped by 90% last year.
- The International Energy Agency (“IEA”) predicts that 2023 will see another jump in EV sales for a total of 14 million.
- Under a conservative scenario, the IEA estimates that EV sales could reach 20 million in 2025 and 40 million in 2030, which will represent 20% and 30% of all vehicle sales in those years.
- The U.S. federal government has set a target of 50% of all vehicle sales to be electric by 2030; this compares to less than 5% in 2021.
- According to the IEA, the global public EV charging infrastructure will grow from the current 2.7 million chargers to around 13 million by 2030 to keep up with demand. Large-scale expansion will have to take place in the U.S. and Canada where only 160,000 public chargers were available by the end of 2022.
- The U.S. government wants to add 500,000 public EV chargers over the next few years and has earmarked $7.5 billion for this purpose.
Competition is heating up
Competition in the space is heating up as numerous participants battle for market domination.
EVgo has set out to compete in the DC market with little presence in the slow-charging market. Significant U.S. competitors in the fast-charge market include the market leader Tesla, Electrify America (owned by Volkswagen), and ChargePoint. Apart from the GM agreement referenced above, Tesla also announced their intention to make 7,500 U.S. chargers, including Superchargers, available to users of all brands of EVs by the end of 2024. Other potential competitors include Hertz and BP which plan to build a national fast-charging network across the U.S. with BP committing to invest $1 billion in EV charging in the U.S. by 2030.
According to data provided by the U.S. Department of Energy , EVgo has a market share of 8% of all publicly available charging point connectors in the U.S. Tesla is the outright market leader with a 62% share of the fast-charging direct current market.
In a survey of more than 5,500 EV owners, the non-profit advocacy group Plug In America highlighted the dissatisfaction of a large complement of users with the public charging infrastructure; the most common concerns were broken or non-functional chargers, too few locations, slow charging speeds, and high charging costs.
However, the Tesla Supercharger network was considered significantly better than its competitors in every aspect surveyed. More than 20% of all respondents reported a major difficulty using the EVgo network because chargers were often non-functional. Similar concerns were voiced regarding the ChargePoint and Electrify America networks.
Balance sheet – newly raised capital will help, but not for very long
The company had shareholders' equity of $474 million by the end of March 2023, and total long-term debt (including operating leases) of $48 million.
Cash and short-term investments amounted to $164 million at the end of the first quarter; this will be supplemented with the $120 million raised through the issue of 29.4 million Class A common shares on 22 May 2023. We note that these shares were issued at $4.25 per share, well in excess of the current share price, and that it increased the class A share count by 41%. As a sign of confidence, the controlling shareholder contributed $5 million to the capital raise.
EVgo has a heavy cash burn rate running at about $19 million per quarter at the operational level and a further $65 million absorbed by capital expenditures. This implies that at the current rate of operating losses and capital expenditures, the company has enough cash to sustain the business for about one year.
The capital raising options have also become less attractive as interest rates moved up while the depressed stock price makes equity issues expensive and dilutive.
Risks
EVgo actively pursues government subsidies and incentives to lower their capital cost and operating expenditures. Amongst others, EVgo has received grants from the Florida Department of Environmental Protection, the Colorado Energy Office, and the California Energy Commission. In addition, EVgo benefits from federal tax credits that subsidize the cost of charging stations and earns regulatory credits, such as low carbon fuel credits, in states where these programs are operational. In the most recent quarterly report, the company noted that almost 5% of the revenues was made up of regulatory credit sales. The risk to the company is that these programs are normally temporary and can change or be scrapped altogether.
EVgo qualifies as an “emerging growth company” under the definitions applied by the U.S. JOBS Act of 2012. This allows the company, among other things, not to provide an auditor’s attestation as to the adequacy of internal controls over financial reporting or adopt new or revised accounting standards within the same timeframe as larger companies. EVgo management previously identified material weaknesses in the company’s internal control over financial reporting. Remediation efforts are underway but as per the company’s recent reporting, it may extend beyond the end of 2023.
As noted in the corporate governance section, the company is controlled by a single shareholder which may not necessarily act in the best interest of all shareholders.
Corporate governance: LS Power in control
The controlling shareholder is LS Power Equity Partners LP , a Delaware-registered limited partnership that effectively holds 73.2% of the voting rights in EVgo through Class B shares. Class B shares have no economic rights but entitle the holder to one vote per share.
LS Power is an investment and operating company focused on the power and energy infrastructure sector, established in 1990. The company claims to have developed and acquired more than 46,000 MW of power generation and over 680 miles of transmission infrastructure and have raised $50 billion in debt and equity financing.
Other prominent shareholders are the Vanguard Group and Blackrock.
David Nanus (age 48) is the Chair of the board of directors. He is the President of LS Power Equity Advisors. LS Power also has four other board directors which together form the majority of directors.
Catherine Zoi (age 61) is the Chief Executive Officer and has served in this role since November 2017. Previously she was the CEO of Frontier Power, an energy investor at Silver Lake and Bayard Capital, and served on the boards of Ice Energy, SES, and Pacific Solar. She also worked in the Obama Administration as Assistant Secretary at the Department of Energy, where she oversaw more than $30 billion in energy investments. She holds degrees in geology from Duke University and engineering from Dartmouth.
The annual compensation of the executive officers consists of three components: a base salary; an annual cash bonus, and long-term incentives in the form of equity awards.
The annual cash bonus is based on overall company and individual performance. For 2022, the bonuses of the executives were based on 5 key performance indicators including the total amount of kilowatt hours consumed by EVs using EVgo chargers, the total number of charging stalls that EVgo has operational on its network, company revenue, and company EBITDA.
The CEO received a total compensation of $4.6 million in the 2022 fiscal year of which the cash component was 20%.
A speculative valuation
EVgo is growing rapidly with revenues more than doubling in 2022 – with consensus forecasting that it will grow by another 650% until the end of 2025. Gross margins are also improving and are expected to move into positive territory in 2023.
However, that is where the good news ends. EVgo made considerable – and growing - losses in each of the past 4 years and based on consensus forecast, the next few years will deliver more of the same. Negative free cash flow will remain a drag on cash resources for at least the next 3 years and the company will have to raise fresh capital at regular intervals possibly further diluting current shareholders.
Prospects for profits in the near term are also not promising. As per the company’s estimates , EVgo will lose between $60-$78 million at the EBITDA level in 2023.
Analysts that follow the company estimate on average that the losses will continue in 2023-25 but that EBITDA could turn positive in 2025. Based on 2025 estimates the stock trades on an EV/Revenue multiple of 6.2 times and an EV/EBITDA multiple of 61 times. However, these estimates are subject to large potential errors and should be considered as speculative.
A risk not worth taking
EVgo is growing fast but so are the accumulated losses. Competition is fierce and will continue to ramp up under the lucrative incentive and subsidy schemes offered by various levels of government. EVgo is a credible competitor in the fast-charging market but is not a market leader. A take-over bid from a deep-pocketed entity wishing to gain access to the U.S. EV charger market is not enough incentive given the risk involved in this investment.
By Deon Vernooy, CFA, for TSI Wealth Network
For further details see:
EVgo: Risks May Overshadow The Potential Reward