Electric vehicle charging station developer ChargePoint (NYSE:CHPT) unquestionably has an enormous potential opportunity in front of it. Yet CHPT stock has struggled.
CHPT stock has been halved from late December highs. The key question now is whether the sell-off is due to the market coming to its senses or losing its mind.
To some extent, the former is true. The rally in CHPT from $14 in late October to $49 two months later was simply too much. It was part of a broader rally in anything EV-related, with battery developer QuantumScape (NYSE:QS) seeing truly bubbly trading.
That broader rally has reversed so far in 2021 — with some good reason.
That said, there’s a reasonable case that the current CHPT stock price indeed is an opportunity. ChargePoint’s market is enormous. EV adoption is expanding at a rapid clip. Government efforts in the U.S. and abroad will provide some help.
Though I’ve generally been cautious toward valuation, I’ve long thought CHPT was the best pick in its group. While I still believe that’s the case even after the sell-off, risks remain.
Projections and Guidance
Like so many other newer EV stocks, ChargePoint went public through a special purpose acquisition company (SPAC) merger.
One of the big reasons why is the ability to make projections. A company executing a traditional initial public offering generally can’t make forward-looking statements. A company going public via a SPAC — which, again, is a merger — generally can.
The problem is that the projections unsurprisingly are optimistic. As the Wall Street Journal pointed out, multiple SPACs have promised to beat the record for reaching $10 billion in revenue the quickest. The record currently is held by Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL). Many — maybe all — will fail to do so.
ChargePoint is not one of those SPACs, but it’s made audacious promises nonetheless. At the time of its merger, it saw revenue going from $135 million in FY2021 (ending Jan. 31) to over $2 billion by FY2027. Adjusted EBITDA is projected to reach $340 million by FY2027, a healthy 16% of revenue and a notable change from the roughly $116 million loss on that basis reported for FY2021.
The good news from the Q4 release is that guidance for FY2022 revenue matches the original outlook given when the merger was announced in September, but the post-earnings conference call highlighted the still-extant SPAC problem for CHPT stock.
ChargePoint said in its merger presentation that this year would come in around 31%. An analyst on the call asked if that projection still held.
In response, chief financial officer Rex Jackson did predict expansion “as we go through the year.” But he also demurred in providing actual guidance, saying the company was too “heavily mix-dependent” between commercial and fleet sales.
Margins and CHPT Stock
It’s difficult to see that as good news. If ChargePoint did expect to top 31%, it seems likely that management would happily say so.
That aside, the inability to guide for FY2022 in April, and to project FY2027 in September, gets to the heart of SPAC skepticism. Can investors really trust any of these projections if management can’t stick to all of them less than a year later?
And, especially at this valuation, those projections still need to be reasonably correct. ChargePoint has a market capitalization of more than $7 billion. Enterprise value to EBITDA, using the FY2027 figure, still sits at 20x. There are stocks out there where hitting projections means massive upside. CHPT isn’t necessarily one of those stocks.
One of the risks appears to be on the margin front. One of the long-running worries about charging stations is that they will become “commoditized.” There may not be much differentiation between, say, a ChargePoint station and one from Blink Charging (NASDAQ:BLNK).
Commoditized products generally have little pricing power. For EV charging stations, that gets to a point where the hardware and electricity largely are provided at cost, while the money is made on software.
To be fair, that’s not terribly far from ChargePoint’s long-term plan. The company has said it expects gross margin expansion to be driven by its software-driven recurring revenue. But there’s a difference between low margins in hardware and zero margins in hardware. Are we seeing an early sign that the latter trend is what will take hold?
The Long View
Admittedly, these concerns to some extent come down to nit-picking. A CHPT bull could argue that the opportunity is big enough that a few points of margins or growth here or there don’t break the case for the stock.
That might well be true. But in the meantime, these small things do matter, particularly in a market that’s clearly lost some confidence in EV plays and in post-SPAC stocks.
From a long-term perspective, any weakness on the margin front adds pressure to top-line performance. ChargePoint simply must win in a space that includes Blink, Volkswagen (OTCMKTS:VWAGY) unit Electrify America and many other companies.
That includes success in Europe, a relatively new market. On the Q4 call, ChargePoint was bullish on its business on the Continent, but EVBox, which is merging with TPG Pace Beneficial Finance (NYSE:TPGY), is the leader there, and it’s using its own SPAC capital to enter the U.S. market.
Underpinning the competitive worries is another big question: how big will the need be for away-from-home chargers? In a world where EVs are ubiquitous, home charging stations will be the same. That, in turn, limits ChargePoint’s market.
To be clear, none of these questions make CHPT stock a short. None even should keep investors away from owning the stock.
But they’re real questions. And the decline in CHPT over the past few months shows that many investors are asking precisely these questions. Shares probably don’t see a sustainable rally until ChargePoint starts to answer them.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
