ChargePoint: Navigating Challenges Both From The Industry And Its Own Operations

seekingalpha04-13

ChargePoint's thesis of investing in the growing EV market and under-supply of charging infrastructure is fading.EV sales are slowing down, car makers' EV plans are halting, and competition is ...

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Hoover, the trend is shifting slowly and these assumptions for the company's success are fading - EV sales are slowing down, carmakers' plans in EV are halting, competitions are more intense and, most importantly, ChargePoint still cannot turn its business around in terms of profitability and cash flow. None of the factors I look at show that it is a good investment - therefore, it is a Strong Sell. Image created by author To analyze CHPT, I follow the logic below: CHPT Investment Potential = EV Market * EV Charging Demand * Company Operation Efficiency EV Market: Headwinds ahead for the whole industry  The most significant indicator of the industry has to be Tesla's performance. Surprisingly, the company not only posted its first annual sales decline in 3 years, but in a worse-than-expected %. While supply chain constraints and the weakening economy are to be blamed, there is a fundamental problem that carmakers start to realize - customers are looking for something else. Boston Consulting Group On one hand, customers are not willing to pay a premium for EVs, which makes companies racing to the bottom to compete with their peers that squeeze profits out of these EV makers. This is exemplified by car makers' delay in plans for 100% EV sales and other EV targets. On the other hand, EVs have not matched the experiences of a traditional ICE vehicle in terms of range and charging (or refueling). While vehicle range is related to the battery technology, which is covered in my last analysis on QuantumScape, charging speed is directly related to CHPT, which will be analyzed in the next section. EV was a hot investment theme, and now with the demand wanes and more fundamental problems (like battery limitations) emerging, the future of EV has become more uncertain. One underlying assumption for investing in charging infrastructure has been that EV will continue to penetrate the market. But with the industry outlook has become bleak, one has to rethink about this. JD Power EV Charging Company: Fundamentally challenging business model Operating a network of EV charging stations requires huge up-front investment and a long break-even period. Each station takes 4 to 5 years to breakeven, while the asset value of the station will depreciate. On the other hand, the profitability and cash flow of the charging station will depend on the electricity price and the pricing of the charging service. Take one station with 20 slow (120kW) charging ports as an example: The total construction cost is at around US$150,000, 60% of them are the equipment, 30% are rental (which would be an annual expenditure), and the rest is the construction cost. In terms of income, assuming an optimistic utilization rate of 10%, annually $100,000 of service charge can be received. However, this will be offset by rental that is approximately at US$40,000 and another US$30,000 of operation cost which includes electricity price and maintenance. Image created by author with data from McKinsey Therefore, the prospect for charging a network operator depends on a few parameters and assumptions:  Utilization rate: The first batch of charging stations has enjoyed the first-mover advantages of selecting the best locations, which will not be the case for future's charging stations. Utilization rate and hence the income of these stations will be lower Rental: When landlords see the demands for EV and hence the demands for charging stations, rental of quality plots will surely go up. Approximately at 50% of the annual income, the increase in rental expenses will severely impact the operators Electricity price: The \"raw materials\" of a charging station is electricity. With the price of energy expected to increase further, it will be more difficult for the charging operators.  What makes it difficult for the charging network operators is that, these factors are not in their control. Therefore, these companies are operating under a passive situation. Although ChargePoint does not construct and operate the stations themselves but to sell it to other operators, the despair of the industry will ultimately impact CHPT's sales. ChargePoint: Struggling in profitability and long-term growth Image created by author with data from CHPT When I look into the company's financial statements, it is not any better than the macro outlook. For the first time in 3 years, ChargePoint has delivered a negative 7% of gross margin. According to the management, this is due to the one-off impairment cost of its manufacturing and supply chain. Although the management has explained that this is a one-time only cost, and it is setting up the company to its future success, this has two implications on the prospect of the company:  Over-capacity: This is in line with my industry analysis that with EV demands diminishing and the business conditions for charging station operators worsening, the business of CHPT will be negatively impacted, hence the change in its supply chain Deteriorating margin: Even if I took out the cost from its cost of revenue, the company still had a negative gross margin, which is lower than its previous years. This is shown problems in the company's operations and products.  This is a result of the plummeting sales from the company's main business, sale of its charging systems. In Q4 2024, the company's revenue has dropped 40% year over year, which is alarming against the industry backdrop that I have discussed. In terms of financial health, while the company still has around $350 million of cash in its pocket, $290 million of it is actually from the equity offering in last year, which has led to a more than 15% drop in share price upon the news. Since the company is basically sustaining the company from stock offering, investors should ask themselves: when is next? In the past two years, the company's operation is burning on average $300 million cash each year. Hence, this should give us a hint that if the company does not turn around its profitability and cash flow, which is difficult, the company is likely to raise another round within the next 6 months. Overall valuation Image created by author with data from CHPT Based on the development trajectory of the industry and company, I anticipate that the company will only be able to grow at a mid-single digit growth rate in the coming two years, which is in line with the rate in 2024. More importantly, affected by the supply chain factors and rising costs, the company will only be able to recover its profit margin slowly to around 15% in 2026. Since the company still has negative EBITDA, to accurately price the stock, I will use a EV/Revenue metric. EV charging companies' valuation has been suppressed for an extended period of time, as shown in the below graph. I anticipate that this will continue to be the case, since EV charging operators are not at a position to improve their position easily. Therefore, applying a slightly-improved EV/Revenue in 2026 to the share price, and using the projected revenue, the target price is at $1.59 per share, which is around 10% lower than the current level. Data by YCharts Investment risks Investment in CHPT is risky, as my analysis suggests. But there are certain risks and events investors need to be aware of, should they consider to invest in the company:  Change in policies: Currently, the Inflation Reduction Act and other subsidy schemes in the US for EV charging infrastructure have been driving the industry forward. If the government considers halting these favorable policies, the company's business will be severely impacted Change in market: As outlined before, the EV market is seeing a potential shift from \"all for EV\" to a more \"maybe\" stance. Carmakers are pausing their plans to transition into 100% EV. This has a critical implication to the company since its business hinges on the numbers of EVs and the demands for charging Technology disruption: Hydrogen fuel cell car, and other technologies in clean energy, are potentially disruptors to the lithium-ion battery car market. Investors in the long term should pay attention to how hydrogen car, like the development in Japan, would impact the EV market  Conclusion  News about the shirking EV market and unfavorable development in the sector are suggesting that the company will face many challenges ahead, on top of the operational problems that CHPT is having now. The company is struggling in profitability and cash flow, and is expected to raise another round of equity financing. Investors should be careful about all the risks. 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