Stock ChargePoint: bullish but costly operating model

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ChargePoint Holdings (CHPT) is one of the leading electric vehicle (EV) charging infrastructure networks in the United States. While much of the company’s revenue is based on their hardware charging systems, the real value lies in their higher-margin, more recurring subscription revenue.

The company recently reported another strong quarter with revenue growing nearly 80% and beating consensus estimates. However, profitability continues to be under pressure given the massive investments needed to scale their electric vehicle infrastructure and attract new customers.

ChargePoint stock price
Data by YCharts

The electric vehicle market seems to be going through a positive fundamental shift, with the US government investing more in this transition. ChargePoint is likely to be a long-term winner from a business model perspective, but their stock is already priced well, trading at 19x forward earnings.

I’m bullish on the company, but think the valuation is too expensive to build a position, even after a near 50% growth spin-induced pullback in recent weeks.

Let’s not forget that the majority of the company’s revenue comes from building its hardware infrastructure, which comes with lower margins. Higher-margin subscription revenue is only about 20% of total revenue, although current valuation seems to indicate that 100% of the business should be considered a SaaS business.

For now, I’m on the sidelines and will wait for a better entry point. As the use of electric vehicles continues to grow in the United States and the rest of the world, it will require significant capital to invest in infrastructure, which could impact the company’s profitability for many years. many years to come.

Financial analysis

In the last quarter, the company’s revenue grew nearly 80% year-over-year to $65 million and exceeded expectations by $2 million. Network Charging Systems revenue represents more than 70% of total company revenue and continues to drive growth, with revenue of $47.5 million growing 111 % year-on-year. Unsurprisingly, ChargePoint continues to expand its activated ports, with 163k at the end of last quarter including 45k across Europe.

Subscription revenue represents just over 20% of total revenue and grew 24% year-over-year to $13.4 million, although this revenue is more recurring and highly visible.

ChargePoint Revenue Trends

Charging point

One of the biggest growth opportunities for the company remains the expansion of its enabled ports as well as international expansion. With a majority of revenue still being generated from North America, EV use is actually higher in Europe, so there remains significant potential for growth.

Additionally, as ChargePoint began to gain momentum, non-GAAP gross margins improved to 27% from 20% a year ago. I believe that as the business continues to grow and better leverage its spend, margins will continue to improve over time.

Charging station operating expenses

Charging point

Gross margin expansion will eventually trickle down to non-GAAP operating income. With non-GAAP operating expenses still accounting for nearly 100% of revenue, it’s clear that ChargePoint is reinvesting to improve its product and increase revenue. The lack of profitability from non-GAAP operating income is a bit of a concern given that the company sells hardware ports, though the software/subscription aspect of the business may help offset that in the long run.

For the rest of the year, the company expects FQ4 revenue of $73-78 million (which was above consensus estimates of $72 million) and FY22 revenue of $235-240 million (which was higher than the consensus estimate of $232 million).

Great business model, but careful with inventory

Although the majority of the company’s revenue comes from its network charging system hardware, the company believes it is more of a software company than a hardware vendor. To some extent, I agree. The real value of the business is in its subscription revenue, which tends to generate higher margins and is more recurring.

However, for the company to start generating subscription revenue, it needs to expand its hardware infrastructure. The hardware part of the business is widely used to attract customers to their platform and once they start using the infrastructure, ChargePoint can start generating higher margin subscription revenue.

Given the rapid increase in interest in electric vehicles, I believe the market will start to become even more competitive. ChargePoint was able to gain a leading market share, however, I believe increased competition could lead to pricing pressure and market share deterioration.

Growth of charging points directly proportional to the penetration of electric vehicles

Charging point

By way of comparison, consumers are generally not loyal to a single gas station. If there are three gas stations in view, the majority of consumers will likely opt for the one that suits them best or is the cheapest. Although electric vehicles are still a rapidly growing market, increased competition could potentially reduce consumer loyalty and make charging cheaper (which could impact ChargePoint’s profitability over time).

On a positive note, the White House recently released its Electric Vehicle Charging Action Plan in addition to government spending that may come from the Infrastructure Investment and Employment Act. During the company’s recent earnings conference call, management commented on the law on investment in infrastructure and employment, noting that this is a positive development for electric vehicles.

And on the policy front, the passage of the Infrastructure Investment and Jobs Act provides up to $7.5 billion to accelerate pricing along highways and in our communities. . It’s proof that America’s political leaders are committed to an electric future. We work with policy makers at the federal and state level to shape this. While other state and utility programs are currently in place, this new stimulus will likely manifest significantly from 2023 onwards.

With the White House Electric Vehicle Charging Action Plan, they aim for the United States to have 500,000 chargers nationwide and 50% of electric vehicle sales share by 2030. This plan also put in place the processes and controls in place to expand the use of electric vehicles. , although a major driver of increased EV penetration is driven by consumer interest. If consumers are slow to adopt EVs or if EVs remain a high initial cost (although this may be subsidized over time), it may take several years or decades for EVs to become more mainstream.

With about $5 billion to be used on the infrastructure bill, states will have some money to improve roads and infrastructure for electric vehicles. I think this is a good step forward for EVs, although I also think it will attract more competition (negative for ChargePoint) and potential price pressure. If the government is willing to subsidize some of the EV-related spending and increased competition takes hold in the market, EV infrastructure enablers, like ChargePoint, could face negative pricing pressure.

Evaluation

Even though the company has shown very strong revenue growth over the past few quarters, I think the current valuation places too much weight on the company’s networked charging systems infrastructure. Yes, subscription-based revenue is very valuable, but only represents about 20% of total revenue and investors should consider the company’s low-margin hardware.

The company’s current valuation seems to imply very strong growth for many years to come as well as a valuation more closely aligned with higher growth SaaS companies, which I disagree with. ChargePoint’s economy is not 100% SaaS-based, which means that even as the business scales, its non-GAAP operating margins will be challenged to improve significantly. The hardware part of their business has lower margins and will continue to weigh on profitability even as they expand their infrastructure.

For example, the company’s non-GAAP gross margins, although having shown great improvement, are still below 30%. This compares to gross margins of around 80% for the leading SaaS-based company. Yes, over time ChargePoint will likely see its margins increase, but I find it very hard to believe that its gross margins will ever approach anything close to 80%.

ChargePoint EV to Revenue
Data by YCharts

The company has a current market capitalization of $4.85 billion and with approximately $365 million in net cash, ChargePoint has an enterprise value of approximately $4.5 billion.

For next year, consensus currently estimates revenue at $380 million, implying a FY23 revenue multiple of approximately 12x. If we were to compare this to other market-leading SaaS companies with very strong revenue growth and significantly negative margins, one could say the valuation is not out of the ordinary.

However, much of the company’s revenue and growth is driven by its low-margin hardware solutions. Thus, investors should take this into account when it comes to valuation. Plus, margins aren’t likely to increase near the top SaaS-based companies, so why should the valuation reflect ChargePoint as a leading SaaS company?

I like the business model of the company and believe that significant investments in electric vehicle infrastructure will benefit many companies in this sector, including ChargePoint, but with the stock still trading around 12x the earnings of at 23 and 19x forward earnings, there appears to be plenty of priced success already in the stock.

For now, I’ll stay on the sidelines for a better entry point. Granted, the stock is down nearly 50% in recent weeks, though many of the top SaaS and software companies saw declines of more than 50% as investors dumped high-value growth stocks. . I think ChargePoint becomes more attractive with a valuation below 10x revenue or if their subscription revenue (~20% of total revenue) starts to increase as a percentage of revenue mix.

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