Is CHPT still a Buy after its 32% YTD Fall?

Though electric vehicles are in huge demand, electric vehicle charging companies have yet to prove the viability of their business models. ChargePoint Holdings [CHPT], despite being a leading player in the electric vehicle charging segment, has been consistently losing value since the last one-year.

The company is now close to its 52-week low, down 32% year-to-date so far. However, the market believes that as the demand for electric vehicles is going to escalate over the coming years, the demand for electric vehicle charging infrastructure, too, will grow over time. And ChargePoint, with one of the best electric vehicle charging infrastructure networks in the United States, will be able to capitalize on this rising demand.

ChargePoint Holdings is an America-based electric vehicle infrastructure company that operates the largest online network of independently owned EV charging stations. The company develops this technology by itself, and at present has around 163,000 charging points over the world. Currently, it operates across 14 countries and is consistently making efforts to expand.

Electric vehicles are the future and ChargePoint has been playing an important role in churning out the zero-carbon future. The optimism over the global decarbonization of transportation is huge, such that in California alone, sales of passenger electric vehicles are expected to reach 4 million by 2030.

Consequently, demand for charging stations will increase as well, possibly growing at a CAGR of 38% by 2024. Besides, the federal government is also prioritizing a robust electric vehicle charging infrastructure by planning to increase the number of charging stations by 500,000, thereby providing these industry players with a greater chance to achieve success. ChargePoint, with a highly diverse network, already has an edge over its competitors.

Yet to Turn Profitable

One of the biggest concerns about ChargePoint is the huge pile of losses it has been generating consistently. Despite growing its revenues, the company’s losses are mounting. For example, in the third quarter of 2021, it generated $65 million in revenues, beating the market’s expectations, but its net loss for the quarter stood at a whopping $69 million.

The revenue represented a 79% year-over-year growth, but was offset by the operating expenses, which had almost doubled within the same duration, with Research & Development expenses forming the majority chunk of it. Additionally, ChargePoint’s free cash flows were also negative at $52.2 million, but its net cash and equivalents of $365.9 million ensure the company has ample liquidity.

Such high expenses incurred by ChargePoint are necessary for its future viability, as they are mainly being incurred to expand the company’s network of chargers. Though justified, the company still has to make additional efforts to keep its operating expenses under check so it will be profitable in the coming days.

The Tipranks’ Stock Investors Tool indicates 7 out of 11 Analysts have given ChargePoint a Buy rating, whereas another 4 of them have suggested a Hold on its shares. However, none of them have suggested a Sell. The highest price target for the stock is $37, which shows a potential upside of a little over 174% from its February 11th closing price of $13.50. The average CHPT price target is $27.09, which implies a healthy 100.7% upside on the stock.

Good Business Model

The business model of ChargePoint is quite sound as a whole. The company is in the high margin SaaS-focused segment and usually earns from a recurring subscription-based SaaS model. However, instead of wholly depending on a single source of cash flow, the company earns its revenues from two main sources, namely the Hardware sector and the Subscription sector. ChargePoint earns Hardware revenue from selling the chargers and other related equipment, whereas the Subscription revenue comes from selling off software services and warranties.

ChargePoint’s revenue model and access to the large charging network for the future of transportation will ensure the company with a steady inflow of cash consistently over the years and thereby help it build a sustainable future.  

High Competition with Low Pricing Power

It is a well-known fact that the global electric vehicle market is on the verge of breaking out. Though such high numbers of electric vehicles in the market could provide a greater opportunity to the company, it would also lead to an extremely competitive environment. Fierce competition coupled with price wars can be demotivating for an organization. Also, at present, the consumers, in general, are usually not loyal to a single gas station and prefer ones that are either the most convenient or are the cheapest. In the case of electric vehicles, the same theory will be applied to the charging stations as well, and due to this price game ultimately the company’s overall profitability will be hampered.

ChargePoint is poised to grow in the long term, as it already has a tremendous hold in the growing market of electric vehicles. The company at present has one of the largest networks of charging stations and if things go as planned, it will continue to remain the leading EV charging network operator, even after a decade of largely rewarding the investors who had believed in its vision. However, all the piled-up losses make the stock suitable only for patient investors who have a high appetite for risk.

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