2023-03-06 10:39:58 ET
Summary
- EV charging economics aren't high enough to sustain investor interest.
- With Tesla opening up its charging to non-Tesla vehicles, it takes away the primary competitive advantage.
- EVgo is destined to lose the EV charging race, meaning its investment upside is limited.
The stock market has been good to speculative, non-profitable, small cap stocks like EVgo ( EVGO ) this year. Shares of the fledgling EV charging company are up over 54% despite rather dismal financials.
The recurring revenue stream of charging cars seems intriguing; almost like being an early investor in gasoline companies when the Ford ( F ) Model T rolled off assembly lines into the consumers driveway.
However, the scale needed to actually have a competitive advantage requires significant capital investment. Additionally, the business model isn't particularly high margin. Meaning EVGO will need to raise substantial amounts of money and maintain investor interest in a low-margin business.
Over the past 9 months EVGO invested $133.9M in property and equipment which was offset by just $27.3M in revenue. Through Q3 the company burned through $184.2M in cash, leaving just $300M at the end of Q3.
This is a problem considering the company is in a race to build out EV charging stations with other upstart competitors such as ChargePoint ( CHPT ), Wallbox ( WBX ), and Blink Charging ( BLNK ). All are going up against the vertically integrated, and profitable, Tesla ( TSLA ).
As of Q4 Tesla had 4,678 Supercharger stations globally - a 35% increase over the prior year's quarter. In contrast EVGO had 2,625 charging locations at the end of Q3 - a 47% increase over the prior year. By the end of the fiscal year, EVGO estimated 2,800 - 3,100 charging stalls.
In the past, EVGO's competitive advantage was the fact Tesla's 4,678 EV charging stations were exclusively available only to Tesla brand cars.
However, that appears to be changing after the President of the United States acknowledged some Tesla Superchargers would be open to other EV's. Tesla reaffirmed in a recent investor day the intention to open up charging to other EV brands.
Charging Economics
Aside from the fact one of the main competitive advantages for EVGO is going by the wayside, electric vehicle charging economics don't seem overly favorable.
If EVGO's charging economics are similar to Tesla, the company would need to generate $10B in revenue in order to generate $1B in operating profit. The problem is, EVGO's gross margins actually seem considerably worse - even when you strip out depreciation and stock-based compensation.
Q4 Earnings
EVGO reports its earnings on March 22 and Wall Street estimates have the company producing over $20M in revenue.
Revenue | Growth Rate | |
Q1 2022 | $7.7M | 86% |
Q2 2022 | $9.1M | 90% |
Q3 2022 | $10.5M | 70% |
Q4 2022 Est | $20.7M - $27.7M | 180%+ |
FY 2022 Guide | $48 - $55M | 117%+ |
Even with the explosive 117%+ growth anticipated, the stock is still trading at over 9x TTM sales. Looking forward, Wall Street is anticipating the growth continuing, with over $147M in revenue for 2023 - representing 205% growth.
EVGO certainly checks the box of strong revenue growth to justify a higher than average multiple, however at what cost will it come in the form of dilution or other financing next year? The company already has a $200M share sale agreement in place, and it will be interesting to see how much of this was drawn on since being announced in November.
One Winner
Any investor around long enough has seen plenty of new business models come along to only see one company come out on top. Uber ( UBER ) vs. Lyft ( LYFT ), DoorDash ( DASH ) vs. a plethora of others are recent ones that come to mind.
The electric vehicle charging business model feels similar. It's ultimately a low-margin business that is difficult to build a strong competitive advantage unless the company aggressively expands. Given the higher interest rate environment and the fact EVGO trades under $10/share - it's going to be difficult to outspend the competition.
Additionally, when consumers have choice, they tend to move to the companies that deliver the best experience. In a JD Power poll, EVGO ranked last, meaning the company will likely have to continue to invest in software and upgrading equipment in order just to keep up with competition.
Overall, I anticipate Tesla being the dominant EV charging option, with room for possible one secondary option. In the stock market, I don't like investing in company's destined to win a silver medal at best, especially when the gold medal winner has a vertically integrated model that is already profitable.
Conclusions
EVGO is chasing a low-margin business that requires far more capital investment than it has at the given time. With Tesla willing to open up its existing charging locations to other brands, it diminishes the opportunity to serve the non-Tesla EV brands. While there will be enough demand for secondary players in the EV charging space, the business economics aren't attractive enough to pay anything over a below average multiple. I would avoid all EV charging stocks including EVGO.
For further details see:
Why EVgo Won't Win The EV Charging Race