EVgo: Attractive Way To Invest In The EV Industry

seekingalpha08-16

EVgo is recommended as a buy rating for investors looking to benefit from the long-term growth of electric vehicles without choosing a specific OEM.EVGO operates a DCFC network across the US, with ...

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(NASDAQ:EVGO) is a buy rating. EVGO provides investors with an avenue to gain exposure to the long-term growth of electric vehicle adoption without bearing the risk of choosing which OEM is the best. Since EVGO operates the underlying charging stations, it benefits directly from industry growth. Notably, it has attractive growth tailwinds that can drive faster growth than the EV industry. Business Overview EVGO EVGO owns and operates a public direct current fast charging (DCFC) network for electric vehicles (EVs) in the United States. As of 2Q24, EVGO has a total of 3,250 charging stalls in operation. As you can see in the map above, EVGO has a presence across the nation (more than 35 states) and reaches out to close to half of the US population. In terms of compatibility, EVGO is in partnership with 11 OEMs. Released two weeks ago, EVGO had a strong 2Q24 revenue performance of $66.6 million, beating consensus estimates of $59.4 million, driven by strong network throughput growth. Adj EBITDA performance also came in better than expected at -$8 million vs. the consensus of $11.45 million. In terms of the balance sheet, the net debt position has improved slightly from $107 million in 1Q24 to ~$93 million in 2Q24, but on a ratio basis, debt to EBITDA remains at ~4.5x. Looking ahead, the strong revenue performance prompted management to revise FY24 guidance. The midpoint of the guide is raised by $10 million to $255 million as they push up the low end of the range (from $220 million to $240 million). Attractive Growth Trajectory EVGO I believe EVGO is one of the best avenues for investors who want to take advantage of the long-term growth potential of EVs without explicitly making a bet on which OEM will win (i.e., investing in EV manufacturers directly). Investing in the underlying charging infrastructure is just as attractive, especially when there are only a handful of scaled players (EVGO is one of the largest), and there are attractive growth tailwinds. Firstly, EVGO operates a DCFC architecture that is structurally superior to the L2 charging architecture because it charges faster, and this is a key factor that EV owners consider when they are looking for a public charging point. Given that this superiority stems from differences in technology, I believe this share gain is structural. EVGO Secondly, I foresee an increasing need for public DCFC stations as the number of EV owners living in multi-family homes goes up (which has been going up). The immediate pushback is that these EV owners can simply charge at home. However, things are not as simple as it seems. Especially for these multi-family homes, they face several constraints, such as high capital costs, limited panel capacity, poor energy efficiency, network infrastructure costs, etc. As such, this demand for charging must be fulfilled by public stations, and evidently, DCFC as a percentage of total charging stations has grown significantly (which also supports my point above that DCFC is the preferred type of charging station). Aside from structural share gains, I think investors should also appreciate the fact that a growing number of ridesharing services are being operated by EVs, and this is a massive growth driver. For these drivers, because of the nature of usage, the distance traveled is structurally higher than personal usage, which means a lot more demand for charging. This can also be clearly seen in the EVGO results, where it stated rideshare accounted for ~25% of all usage nationwide. With ridesharing here to stay and a growing industry, I expect this to be a strong growth driver. EVgo determined that the average rideshare driver charged approximately 5 times more than the average retail customer during 2023. Rideshare throughput reached 24% of total throughput in the first quarter this year, up from 11% in the first quarter of 2021. Businesswire news Importantly, all of these drivers have translated into actual operating performance improvements, wherein in 2Q24, network throughput grew 25% sequentially (note this outpaces the number of EV fleet growth seen in the 1st chart above), driven by more vehicle miles traveled, higher charge rates (higher pricing), a higher rideshare mix, and increased utilization by 100bps sequentially to 20%. EVGO Looking over the longer term, I believe the increasing penetration of EVs is a massive secular tailwind for EVGO. Notably, the industry is actively addressing the main hurdle to more EV adoption in the US: pricing. Based on the current timeline, there will be 38 more affordable EV models in the next 18 months, and eventually, the expectation is for EVs to be priced lower than ICE vehicles. When this happens, I expect to see a strong surge in EV adoption, which benefits EVGO directly. Valuation EVGO Redfox Capital Ideas Management's current estimates include achieving $640 million in revenue and an adjusted EBITDA of $204 million in 3 to 5 years. To sense - check whether EVGO is able to achieve this revenue target, I worked backward to see if the implied growth makes sense. Using the current run rate of revenue, it does seem more likely that EVGO achieves this over 5 years - ~19% growth CAGR - as growth was 32% in 2Q24. Surely, EVGO could achieve this in 3 years if EV adoption ramps up much faster. But I think it is good to be conservative when it comes to modeling. Assuming the target is achieved in 5 years from now (say FY29), the hard part is attaching a suitable multiple to EVGO as there are no suitable public comps. A conservative way to do this is to assume EVGO will trade in line with the index. Assuming EVGO trades at the S&P500 historical average forward EBITDA multiple, I got to an FY29 share price target of $7.45. Discounting that backward at 12% a year (higher than the ERP of 8% because of higher risk), I see an upside of 17%. Risk There are two risks that will slow down growth and make EVGO miss its target. Firstly, EV adoption may not see the strong surge I am expecting as prices continue to stay expensive and consumers don't see a need to switch to EVs since ICE is good enough. Secondly, the development of charging stations may be slower than expected because of regulatory hurdles. Conclusion  My view for EVGO is a buy rating. As the EV industry grows, the underlying charging infrastructure needs to grow accordingly, and I believe EVGO is one of the best ways to benefit from this secular trend. The guidance that management set out over the next 5 years also seems achievable based on my math, and if true, I see an attractive upside to today's share price (even after discounting by 12% a year).","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2459211326"}