Editor’s Note: This article is part of Joanna’s Top Trades — a weekly feature dedicated toward making you money within a specific space. Joanna’s picks for this week are Tesla (NASDAQ:TSLA) and ChargePoint (NYSE:CHPT) as the top EV stocks to trade this week.
This is the first of a weekly investing series focused on thematic Buy/Sell recommendations. This week, I’ll look at electric vehicle (EV) stocks. First, I’ll explain why you should buy Tesla (NASDAQ:TSLA) stock. After, I’ll take an even deeper dive into one of the EV companies you really should consider selling now.
EV Stocks to Buy: TSLA Stock
Tesla is a lot like Apple. It’s not a car… it’s a platform.
As a $580 billion company, Tesla’s valuation now eclipses Walmart (NYSE:WMT). Yet, the EV leader shipped only 500,000 electric vehicles (EVs) last year, followed by Volkswagen (OTCMKTS:VWAGY) at 212,000. The EV market is in its infancy. But Tesla should dominate this space for a decade or more. There’s one key reason why this is true: it’s not just a car, it’s a platform.
From its inception, Tesla has always been a Big Tech company. Elon Musk built Tesla based around a vision of the car as an ecosystem, much like Apple (NASDAQ:AAPL) built its insanely popular tech products. The result: Tesla has beautiful cars. Other EV makers may eventually deliver beautiful cars too. But no other EV maker has a combination of both the physical network (charging stations) and the software.
Now, Tesla is layering on services: autonomous driving, gaming and more. By owning an end-to-end network, Tesla has control over the vehicle data that will enable self-driving cars and the transition to vehicle-as-a-service instead of vehicle-as-a-product.
Knowledge is power. And that’s a great reason to bet on TSLA over other EV stocks now.
It’s entering the only safe haven for traditional automakers
For the most part, Tesla isn’t competing with other EV makers. It’s competing with traditional automakers in a $5 trillion global auto market. Using history as a guide, the threat is real. Since Tesla’s 2017 entry into the EV sedan with the Model S, every traditional automaker has either abandoned the sedan market — e.g., Ford (NYSE:F) and General Motors (NYSE:GM) — or de-emphasized it. Instead, they’ve focused on the crossover, SUV, and pickup truck markets.
Now, Tesla is moving into the traditional automaker’s safe place. The Cybertruck is expected to launch sometime in 2022. As Tesla moves into those markets over the next two years, the traditional automakers will get hit hardest. Over the last year, Audi, Jaguar and Porsche have added new EV models intended to cut into Tesla’s electric dominance. But they have barely made a dent, at least in the United States. Sales of the Jaguar I-Pace, an electric sport utility vehicle similar to the Tesla Model Y, have totaled just over 1,000 this year. Porsche has reported similar sales for its electric sedan, the Taycan.
Bottom Line on Tesla
However, at 65x EBITDA, TSLA stock isn’t cheap.
But as the bellwether of the EV space, with a potential 15% CAGR over the next 5 years, investors should expect the stock to continue to trade at a premium. With the global chip squeeze likely to continue to overhang valuations, look to buy the stock on weakness.
EV Stocks to Sell: CHPT Stock
CHPT has the largest network of charging stations, but that’s not enough.
ChargePoint (NYSE:CHPT) operates the largest network of independently owned EV charging stations in the world, consisting of 114,000 charging stations in 14 countries. The company was formed in a SPAC merger with Switchback Energy Acquisition in March. CHPT makes money by selling charging stations, mostly to commercial customers and servicing those stations. Its revenue mix is a combination of 1) SaaS (software-as-a-service) subscriptions to its charging network (34% of sales); and 2) the physical charging stations themselves (66% of Q1 sales).
CHPT has a low-margin business, even before competition kicks in.
Despite a capital-light business model (commercial customers pay the majority of the costs to install the company’s EV charging stations), and an almost 100% attach rate for software subscriptions, margins on CHPT’s subscription-based software are only 50%. As a comparison, most subscription-based business models deliver gross margins in the 80%+ range. At the same time, margins on the company’s hardware are almost non-existent (5% in F2020). Combining the two segments, the business as a whole generates a very low blended gross margin of 23%. Management hopes to grow its subscription business as a percentage of total sales, which should help drive operating leverage and gross margin expansion. That said, the company’s gross margin forecast of 40% in 2024 (a doubling from current levels) looks aggressive.
There are also plenty of new entrants to consider.
The charging station network sector is already crowded, with competition from other pure-plays like Blink Charging (NASDAQ:BLNK), competition from carmakers and competition from energy giants like BP (NYSE:BP) and Shell (NYSE:RDS.A, NYSE:RDS.B). There are also several new SPACs about to hit the public markets:
- Volta Charging with Tortoise Acquisition II (NYSE:SNPR)
- EVgo with Climate Change Crisis Real Impact I Acquisition (NYSE:CLII)
- EVBox with TPG Pace Beneficial Finance (NYSE:TPGY)
ChargePoint has an aggressive growth forecast, but a challenge looms.
In F2021, ChargePoint generated revenue of $144.5 million. F2022 guidance calls for revenue of $195-$205 million (+38% YoY). The company’s long-term forecast looks very aggressive, calling for 60% compound annual growth for the next seven years, which implies $2 billion in revenue by 2027.
However, there’s an issue with CHPT’s growth projections (and it’s part of what makes it a less appealing play among EV stocks). Despite it having the largest charging station infrastructure today, CHPT’s charging stations are designed to handle a 240-volt charge. These can take eight hours or more to charge. While that’s fine for short-distances, the big issue for EV charging is “range anxiety,” the ability to support long-distance travel. For long distances, EV charging stations require at least 480 volts, which allows for a fast charge in under an hour.
On the other hand, Tesla, which operates the second largest charging network, supplies 480-volt power. Tesla operates roughly 25,000 fast charging stations. In contrast CHPT only has about 1,500 fast charging units today.
Tesla has already outmaneuvered the market with a platform advantage.
CHPT’s lagging 480-volt numbers are only part of the problem. Tesla figured out the range anxiety issue long ago. Despite having only sold a few thousand cars in its early years, it built out a massive charging network to address this issue immediately. Today, anyone who buys a Tesla doesn’t need to worry much about charging. They can drive their Tesla’s for long distances in full confidence that they will find convenient locations to recharge.
By building a proprietary platform, Tesla locked-in two sides of the market: the installed base of cars and the network of charging stations. Because Tesla owns the charging network, it can choose how to price (whether to make charging free and monetize only the car), the number of stations, rollout timing and location. Tesla can also optimize its charging network for where its buyers are located and where they drive. Furthermore, the company is also investing in its own proprietary battery technology to deliver superior charging. Theoretically, a Tesla vehicle can achieve a max charge rate of 250kW at a V3 supercharger, or up to 200 miles in 15 minutes.
In contrast, both traditional automakers and new EV startups focused their investments on trying to build better electric cars. With the exception of newcomer Rivian (who hasn’t shipped an EV yet), the rest of the market is partnering for its charging stations. General Motors is partnering with EVgo; Ford is working with Greenlots and Electrify America, and Stellantis NV is also partnering with Electrify America. Lucid Motors (NYSE:CCIV) (which also hasn’t shipped an EV yet) will use Volkswagen’s Electrify America network.
That means anyone looking to purchase an EV alternative to Tesla has to consider the car and the charging network. As a result, there’s no EV supplier who comes close to Tesla in volume and cost.
Bottom Line on ChargePoint
CHPT stock trades at a rich 40 times forward sales for a low margin business facing intensifying competition, aggressive growth forecasts and ultimately a limited addressable market. All of these factors make it one of the less appealing EV stocks to consider today.
Your comments and feedback are always welcome. Let’s continue the discussion. Email me at firstname.lastname@example.org.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.