ChargePoint Holdings (NYSE:CHPT) got a boost on Oct. 19 when Stifel analyst Stephen Gengaro initiated coverage of CHPT stock with a Buy rating and a $29 price target.
ChargePoint’s share price traded over $35 as recently as late June. Is this initiation the push that the shares need to climb back into the $30s? I think it is.
CHPT Stock Can Climb Again
The last time I wrote about ChargePoint, which provides EV chargers, I suggested that its shares remained an excellent speculative buy in the low $20s. Nothing has changed on this front. It’s still an excellent buy, but only for speculative investors. The company still has to make a great deal of progress before it’s possible to say that it has arrived.
Stifel’s analyst makes two central points about ChargePoint.
First, it has an extensive network of charging stations in both North America and Europe. Secondly, its asset-light business model could enable it to generate positive free cash flow by 2024.
Equally attractive is the fact that ChargePoint’s market share in networked, level two charging is 73%. That’s about seven times higher than its nearest competitor. That’s a big head start in the EV charging market, which is expected to benefit from $60 billion of spending on U.S. and European charging infrastructure spending by 2030 and $190 billion of such spending by 2040.
While ChargePoint could loses its grip on the EV charging market, it has a great opportunity to make a huge amount of money in networked level two charging. And that opportunity will drive CHPT stock higher.
But first, it has to keep growing its business, and that means it will have to burn more cash.
How Much Cash Is It Burning?
How can ChargePoint generate positive free cash flow by the end of 2024?
In September, it reported that its Q2 sales had soared 61% year-over-year to $56.1 million. It also provided full-year sales guidance of $230 million, based on the midpoint of its guidance range. Its non-GAAP gross margin for the quarter was 23.1%, 2.60 percentage points less than during the same period a year earlier. On the bottom line, it lost $40.4 million during Q2, almost double its $22.6 million loss during the year-earlier period.
In terms of free cash flow, for the first six months of fiscal 2022, it used $61.2 million of cash, 22% higher than during the same period a year earlier. In the first six months of 2022, it had $96.6 million of sales. So for every $1 of sales, it was burning 63 cents of cash.
According to ChargePoint’s guidance issued last year, it expected its 2024 revenue to come in at $984 million. Let’s go ahead and round that up to $1 billion.
So in 14 quarters, it’s supposed to go from $56.1 million of sales to $1 billion. That’s a compound annual growth rate of 127.7%. If it grows its revenues by 23% each quarter over the next 14 quarters, it ought to get to $1 billion of sales in 2024.
However, if it keeps up its current pace of cash burn, ChargePoint would be generating a negative operating cash flow of more than $600 million at that time. It won’t stay in business if that’s the case.
The Bottom Line
If the company accomplishes three goals, I think it can start generating positive free cash flow by the end of 2024.
- Its research and development costs in the first six months accounted for 97% of its revenue. When it reaches $1 billion of revenue, it ought to allocate a maximum of 10% or $100 million annually to R&D. That’s only $34 million more than what it spent on R&D in the first six months of this year.
- It has to raise its gross margins. Its networked charging systems have gross margins of 12.7%. The gross margins from its subscription revenue are considerably higher, coming in at 41.0%.If it doubles the gross margins of its networked charging systems and moves the gross margins of its subscription revenue into the low 50s, I don’t think there’s any doubt that it will be generating positive free cash flow when its sales reach $1 billion.
- While the 34% gross margin of its “Other” revenue is reasonable, the sales of that category aren’t significant.According to page 40 of its latest 10-Q, other revenues are the fees that it receives in exchange for regulatory credits. It earns those credits by participating in low-carbon fuel programs in approved U.S. states. This revenue stream won’t last. If it can’t find a more sustainable third revenue stream, I don’t see how it will generate positive free cash flow by 2024.
ChargePoint remains a stock that risk-averse investors should not touch. That’s because, although ChargePoint has a good business, much can change when it comes to charging technology and EVs.
However, if you’re open to speculative risk, CHPT stock remains an excellent long-term buy. The shares might not hit $35 in the near-term. But assuming the world doesn’t do a 180-degree turn and abandon clean energy, the stock will get back to $35 sometime in 2022.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
