Recently, investors have seem worried about electric vehicle (EV) stocks. Chargepoint (NYSE:CHPT) is no exception. On Feb. 9, Chargepoint stock (though it was still SBE at the time) closed at $41.33. Now about three weeks since then, it’s declined some 30%.
Again, we’ve seen a sector-wide selloff, ranging from manufacturers to suppliers to charging-station developers like Chargepoint. It’s not entirely clear why that selloff has happened.
Valuation is one possible culprit. The industry is still young, meaning current revenue is low and profits are rare.
Profit-taking is another. The sector has had a torrid rally since late October, thanks in part to the Democratic Party’s wins in November. Once CHPT and other EV names reversed, some shareholders may have looked to lock in profits.
Whatever the cause, investors should, as always, keep their focus on the long term. Corrections for hot sectors aren’t the end of the world. In fact, they’re common — and healthy.
Admittedly, with Chargepoint stock at some of its lowest levels since November, staying calm is easier said than done. But it’s important to remember that nothing has really changed. The long-term opportunity for CHPT remains intact. And earnings, due on Mar. 11, provide a potential catalyst.
The EV Market and Chargepoint Stock
When I talked about SBE stock and Switchback Energy before — which Chargepoint merged with in a special purpose acquisition company (SPAC) deal — I highlighted the simple, powerful bull case for the stock.
All that needs to happen for Chargepoint’s market to develop is for EV adoption to grow. More EVs means more demand for charging stations. There’s simply no other alternative. And so what makes Chargepoint stock intriguing is that investors don’t have to pick the winners in the space. It doesn’t matter who is manufacturing the EVs, or what their profit margins are. This is essentially a straight bet.
Now, obviously, Chargepoint has to win in its own market. And there is no shortage of rivals at the moment. Plus, more competition is likely on the way.
But Chargepoint clearly has the early lead. At the time the merger was announced, the company said it expected 2020 revenue of $135 million. On top of that, it believes revenue will hit $1 billion when EV penetration reaches just 3% (Page 11).
Both of these figures are impressive in the context of the industry. There are other EV-charging developers with billion-dollar valuations whose 2020 revenues will be a fraction of CHPT’s. And as the top line grows, profit margins should expand, thanks to both economies of scale and a higher proportion of recurring software-based revenue.
All told, Chargepoint easily looks like the best potential winner in the space at the moment. And strong Q4 results this week — along with a positive outlook for 2021 — could remind investors of that fact.
What Could Go Wrong
Now, there is a bit of a catch. Chargepoint appears to be a likely winner, but Chargepoint stock still is priced as such.
Even with the pullback, the company has a market capitalization of $8.1 billion. That’s more than 40 times the company’s original revenue projection of $198 million for fiscal year 2022 (which ends next January).
There are stocks in this market trading at that kind of multiple to sales. But most of those stocks are straight software plays, which have far higher gross margins — often above 70%. In contrast, Chargepoint is aiming for gross margins in the low 40s on a percentage basis even five years from now.
So, even though CHPT has pulled back, there’s a case to be made that the stock still is somewhat expensive. There are risks here, after all. EV adoption could stumble, even if that would be a surprise at this point. Plus, competition will be stiff. The company’s success isn’t guaranteed. In investing, nothing is.
Bottom Line
All that said, still below $30, Chargepoint stock is starting to look like it’s worth paying up for. If there’s been one lesson in the market of the past few years, it’s that paying up for the leader in a growth industry is the correct strategy. No, those picks generally haven’t been cheap. But given the opportunities ahead, they shouldn’t be.
Chargepoint fits firmly into that framework. We know EV demand is going to rise. We know charging stations will do well. And, at least so far, CHPT appears to be dominating the space.
That’s an attractive combination, one that was enough to put ChargePoint stock over $40 before. For investors with patience and the willingness to ride out some possible volatility, it’s worth betting that the stock can get back to that level again — and maybe soon.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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