An Investor's Look at the Electric Vehicle Charging Industry

In this episode of Industry Focus: Energy, by overwhelming listener demand, we're breaking down the EV charging industry. Motley Fool advisor Seth Jayson joins host Nick Sciple to give an introduction to the basics of EV charging and share his thoughts on how to invest in the space. 

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This video was recorded on April 15, 2021.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. By overwhelming listener demand, this week we're taking a look at the electric vehicle charging industry. This week, Motley Fool Advisor Seth Jayson is my guest as we dive into this evolving space. Seth, thank you for joining me.

Seth Jayson: You're welcome. This is an interesting space to me even though I don't own an EV. I follow a lot of green stocks and I invest in some and this is a pretty interesting space to me. Mostly because for years there wasn't really a pure play where you could invest in this. Are you familiar with AeroVironment, the drone maker? They had a division that made one of the best in breed of fleet electric charging systems for years. They got out of the business a while ago because it just wasn't really core for their drone business. Since then, there haven't been a lot of directly listed opportunities, but now we're starting to see some, so it will be fun to talk about.

Sciple: As we've seen electric vehicles, it's been huge in the news over this past year. Tesla (TSLA 4.96%) has really been a key focus and we've seen lots of other automakers move into the electric vehicle space as well, whether it's GM or Ford or Volkswagen or any of the names that you'd be familiar with. With this surge in electric vehicle sales, 2019 had about 300,000 electric vehicles sold, a little bit down in 2020 because of the pandemic. But just to give you context, that's 2% of auto sales in the U.S. You compare that to total EV charging stations, according to the U.S. Department of Energy, we've got 41,488 stations in the U.S. with 100,338 charging outlets. About one in five of those charging outlets today is Tesla. We're selling 300,000 of these a year, we've got 100,000 charging outlets in place. We've got to build some more of these, Seth.

Jayson: I think so. Well, we'll have to talk about whether or not we need to. It's a really interesting space because it seems like it should be almost the same as driving a gasoline car, except it really isn't in a lot of ways. I guess one of the ways to think about it is in terms of range and range anxiety and the reality of owning an EV. Again, I don't own one, but I follow a lot of the better YouTube channels of folks who own them and I read a lot in the space. I believe that it's safe to say that the majority of EV charging still happens at home in people's garages or if they live in a building and they're lucky enough to have a Level 2 charging. They charge at home most of the time because the reality is that most of us, what do we drive? 20, 30 miles a day for most of us. That's well within the range of even the lousiest plug-in battery electric vehicle, even a lot of plug-in hybrids. You may not burn a drop of gas with that daily mileage. 

It's strange to think about in terms of comparability to gas stations because if you drive a gasoline car, you still have to go to gas stations, even if you're only driving 20, 30 miles a day. Once in a while, you have to go to the gas station. But you may happily drive an EV almost forever without ever visiting a gas station if that's your daily mileage. The question for investors looking to get into this space, I think you have to very carefully figure out what it is that you think you're interested in and be ready for an unpopular answer which might be that there isn't a great pure play investment here possibly, but that's getting ahead of itself. But if you think about it in terms of the amount of charging that goes on at home, I think most people who are thinking of investing in this space are thinking more about, what about fast charging on the road? Surely there's going to be a lot of demand there. Who is going to take a road trip, and is there money to be made there? I mean, is that what you think people are getting at or are you interested in a hardware maker? Who makes those charging things that go on the wall in your garage? The answer there is interesting, it's everybody. What's the opportunity there? As an investor, I think you need to figure out what your question is before you can find your answer.

Sciple: Absolutely. This idea that if most of us had the opportunity, you could just top off your gas tank every night that you went at home, maybe you wouldn't travel out to the gas station once a week and there is universal where you can charge at home. That certainly cuts out the frequency that you're going to need to make that trip. You just don't have to leave your house to top off. When you're looking at pure-play or where people are going to be regularly using charging stations, there's got to be places where you're going to run that 300-mile battery down to zero, it seems to be the big opportunity. Or to the extent places are building out charging stations and where you're not in a single family home, whether it's in an apartment building or something to that effect. But Seth, maybe before we dive into some of these companies and their business models, you mentioned Level 2, fast charging, these types of terms. Not every EV charger is the same.

Jayson: Yeah. Can I show some slides? By the way, is that cool with everybody? No one is going to answer except for you.

Sciple: Yeah. For our folks watching live on Fool Live, they can see the slides. We'll share a link to them in the podcast description for folks if we can do that, but, yeah.

Jayson: I'll try to describe what I've got here. I'm going to hit some share screens for those of us who are on the video here. I'm not putting this up here as Jayson, an expert in this, I'm a student like you or an investor in this. When I'm reading about this, I still have to go back to literature, to certain web pages and go, "What's the J1772 plug again, which one is that?" Because if you think about it, everybody is familiar and this is an advantage with Tesla. Tesla has one plug-in for the most part, and it works in their home charger, it works on the road for the most part and that is a key advantage. It was very smart of them to build that out. Now, obviously the rest of the industry, just like the rest of the electronics industry, has to agree on some standard so that not every single car has its own plug, because that way is chaos and you'll never get the infrastructure you need and things will get even more confusing than they are. There's not that many standards but it's already confusing. Just to go through, this is from the JuiceBlog. This is Enel's JuiceBox charger which is a well regarded home Level 2 charger by the way. We'll get to that in a second and they are explaining how things work. 

In North America, the most common standard and even some of the holdout automakers are moving to the standard now is what is referred to as a J1772 charger. That's an alternating current that comes out of the wall in your house. There's a picture of it here that will hopefully have a slide for. Actually if you have anything in the US, chances are you have the Tesla plug over there on the right in this picture. That makes things simplest for Tesla users. By the way, I guess if you buy a Tesla, you also get a converter so you can use any of the J1772 charging stations that are out there. This would be if you had just a wall plug in unit that trickled the juice into your battery overnight, like not very much or if you had a slightly higher Level 1 that's hardwired into the same higher average circuit that might power a dryer or something bigger. Confusing things further is that these are different in the E.U. or in Japan or China. Over in the E.U., Tesla is even moving away from its proprietary plug toward the European standard, which is probably good news in the end but it makes things a little less simple than they were possibly for Tesla users originally. That is what things are like on the plug-in for folks who aren't familiar. 

When we talk about Level 2 charging, I'm going to just discount. Level 1 is if you plug something into the same outlet that you might plug your vacuum cleaner into. You probably have one of these in the trunk of your Tesla or your other car for use at a hotel, this thing trickles three to five miles worth of range into your car every hour. It is not something you want to use except in the most dire circumstances. At home, you generally want, I guess what's called the level 2 charger, these operate on a bigger circuit, 30-50 amps. They may be plugged into a dryer looking outlet or they may be hardwired and depending on how you have it done in your garage. They run 7.5 to maybe 12 kilowatts and they can add between 10 and 50 miles of range per hour. Every manufacturer gives you a different number and it depends on the car. These run between $402,000, maybe installed, depending on where you are. On the road, and I think this is probably what a lot of people are thinking about when they are thinking in terms of investing in EV charging. They're thinking about on-road charging, which generally requires direct current charging, which is called fast level 3 supercharging, whatever. These are in the neighborhood of 50-350 kilowatts. Tesla's Ron, I think it's 120 max, somewhere around 100 normally. 

The Porsche Taycan I think takes 350. It can juice up very quickly, it's a really sweet looking car, by the way. The only thing that has saved me from having to get one of those for my wife, I like to think, is the long wait list. I made the mistake of showing her a Taycan, and if you see the look on her face, I went, "Oh my God, I never should have done that." It costs as much as a house. But these faster chargers can put about 80% of the range into a decent EV from 5% in 20-60 minutes, depending. The problem with these, and the chicken and then egg problem that comes from that is, this might cost somewhere around $200,000 to $300,000 each for the device as well as the infrastructure to run it. That is an awful lot of money. That cost and the fact that you may not recoup it very quickly is the key to whether or not this entire system is going to build out quickly. It's the key to understanding the potential investment return or perhaps disaster from any of the given charge companies.

Sciple: You mentioned that these DC fast chargers are $250,000 per charger. Today, I pulled some estimates, CNBC has cited Alex Partners estimates that globally, we need $300 billion to build out global charging networks to accommodate EVs by 2030. If you're looking at just the U.S. alone, $50 billion for this buildout. Part of that is we're not making these things at scale. We have to figure out how to make these things at super-high scale. But certainly lots of money needs to be spent to build out this infrastructure. Which brings us to the companies and where there may be opportunities and where there may not be.

Jayson: Yeah. I think that those numbers, the folks who create those numbers, they're all smarter than I am. But if you read just a few articles on this and some of the EV specialists sites out there and the green energy sites, they've got people who are really into this and they offer some pretty good articles. I was reading one where the folks went to Electrify America, which is the EV charging system being set up by Volkswagen as it's pennants for cheating everybody on diesel emissions. Out of a bad thing comes a good thing, and they talk to the folks who run it. They've got the same chicken and egg problem. They could have quickly put together a "supercharging system" using the lowest common denominator equipment that would meet that standard, which would be 50 kilowatts. But they didn't want to do that because if you do that, you have to rebuild it again very quickly, because if these things become popular, the larger the cars, they can take more charge more quickly. In a few years, 50 is going to be obsolete, so they went for 350. Well, in order to do this, there weren't equipment manufacturers who could produce these at scale, they had to source them from several different companies and that creates problems with updates, it creates problems with maybe the card readers being different from time-to-time. Although they are doing some good work in Electrify America. If you look at the ratings for their app, which runs their system on Google Play, they're abysmal because they've just not got the simplicity down with the app. Part of that is maybe their fault, part of it is maybe just the state of the market. Like you said, there isn't scale on this equipment yet and so it's going to take a lot more investment. You're going to find similar challenges for every single charging player out there. Only a couple of which right now are pure-play and public.

Sciple: Absolutely. This challenge of getting to scale. Let's talk about some of those pure-play public companies. Are there any names that standout to you as, this is a company of interest to me.

Jayson: Only one of them, there's a couple out there, I guess EVgo is coming. There are some others that are private. Only one of them seems interesting to me and I think ChargePoint (CHPT -2.33%) folks have heard of them, they came public recently via SPAC. I'm going to share the screen in a second as soon as I get to the slide I want because although it's my favorite one, it's still a hot mess in terms of financials. By hot mess, I mean, you're not going to see profits very soon, but also it's just hard to figure out what those profits might be. I'm going to share the screen again, and for folks who are listening to this, what I'm showing is an ugly excel sheet. It's got some graphs and it shows some of the numbers that you get when you look up the finances on ChargePoint, which is CHPT, and you put them in a chart in excel. You're talking about a company that's trading for a market cap of about $7 billion, but only about, what is it, they're $140 million in revenue flat over the year from last year, which isn't a surprise since people just weren't driving much of anything over the past year. 

The cash and debt numbers are a little bit different from what I've circled there because after the SPAC, they've got an influx of cash, so I think they have more like $550 million in cash these days. But what you see there is not indicative at all of what you might expect the company to look like even a couple of years from now. Although the gross margin line, which is low 20%, maybe somewhat indicative of where they'll be. They obviously have to invest a lot in order to get things moving and they are having the same problems with scaling the fast charging. Now, ChargePoint, their business model is not quite probably what you might think of. It's Casey's if you're into the gas station space. They don't own a bunch of gas stations or anything. They provide equipment, they sell some equipment, but they provide basically fleet services and management for others who own the equipment and they provide the operating system for the machines, the operating system for the apps on the phone, and facilitate all of that to run the network. It's more of a subscription and usage revenue model and a lot of this will depend on exactly how the EV play unfolds. 

If people need more large chargers on road trips, they have to convince people to put that equipment in and then manage that equipment. They actually have 70% market share in level 2 charging, they say, which is apartment buildings and other places where you can run those lower levels of charging and the charge that will get you a full battery overnight should you park there or a decent amount of range during a work day in the parking garage at work. That's their sweet spot for right now. They have 105,000 charging pylons or whatever you want to call them worldwide. They're pretty big players. With all of that, you are still talking about only $140 million in revenue per year right now. I like them, the financials I wonder about. I like the strategy well enough, but I like when I go to their website that they seem to be straight talkers, they debunk some of the charging myths and I don't feel like I'm being sold a line of BS when I listen to management, which can be unusual in any of the EV space.

Sciple: Yes. I would say to your point, one name in the EV charging space I would just not recommend to people at all, is Blink Charging (BLNK -0.86%), BLNK. I spent 10 minutes looking at their proxy statement and as soon as I saw the management getting paid more than the company was bringing in in revenue, I said this isn't the company for me. I think one thing at a very minimum in this space is looking for folks that have a real business model more than this, EVs are going to be big and we're playing into that trend. I think you are seeing a lot of promotional folks out there. What I like about ChargePoint is they already have a very strong network, like you said, one of the largest market shares out there and they have a strategy that makes sense. One of the big problems you see from folks is like, "How are EVs going to scale when folks can't charge them at their apartment?" If you live in a multi-family place, you physically can't own an EV just because of the inconvenience of not being able to charge. You can tell a reason why the ChargePoint business model has potential going into the future and to your point, they're selling it to you with a straight face.

Jayson: Yeah. If you and I own an apartment building, we would undertake with somebody to put that equipment and ChargePoint might operate it for us, this would be something we offered folks if we had a parking garage. We could do the same thing with Tesla if we wanted. But if you do that, then you're basically telling everybody who lives there, you have to buy a Tesla if you want to own an EV. That may have been an OK thing to tell people five years ago, but it's not anymore. There's a lot of really nice EVs coming out from a lot of really good car manufacturers. I don't know if you saw the Q4 e-tron launch yesterday from Audi. Great-looking car with a heads-up display. Pretty good range 320 miles or something like that. About 50,000 bucks, right in the sweet spot. Looks like a really nice car. The interior looks like a nice Audi. It's not just an iPad glued on a dashboard like you get in a Tesla. The way I look at it is, I just can't see the future. Maybe it's because I'm not smart enough or I don't have the vision or I'm not jingoistic enough about Tesla. I can't see a future where one company's proprietary plug owns everything. I think this has to go to the standards that we're seeing now. That future favors somebody like ChargePoint. 

You sent me an article today that was very interesting and it was that the electric utilities, a bunch of them were getting together and they were going to put up a bunch of investment and are putting charging stations all around the country. I doubt this is just going to be fast charging. But this is actually pretty good news for EVs in general, and possibly good news for a company like ChargePoint. Maybe they'll do it, but it's unlikely they're going to want to set up maybe their own charging system or their own company that does everything. Maybe they will, but an easier way for them or for smaller companies that want to do this is to use somebody like ChargePoint to provide the service or say, you and I own a gas station somewhere that does decent business. It's got a decent convenience store. We want to add charging, we're going to go to somebody like ChargePoint to add that capacity to our station. That is an advantage, I think, for ChargePoint. But as an investor right now, you are paying a lot of money because everybody else assumes the same advantage.

Sciple: You mentioned existing gas stations and some of this infrastructure. Where do you see them fitting in? Because when I think about it, gas stations have already locked up some of the best real estate that people are driving by, and that are the easiest to get into and out of, and all those sorts of things.

Jayson: Yeah, well, you've already see charging solutions like ChargePoint and some of these other smaller companies at restaurants, highway off-ramps, and other places, because if you've got a decent amount of juice that you can feed to cars, maybe not enough for level three fast-charging, but something else to help people, it's a draw. It's a value add for potential customers. I would be very surprised if we didn't see more of this showing up at places like gas stations. I think the last time I took a big drive, I think we came back from Shenandoah. With COVID we have been driving a whole lot right now. The last time we came back from Shenandoah, I think we might have stopped at a Sheetz for gas. Sheetz is a chain out here that has big gas stations. Were there 15 or 16 pumps probably out front? A ton of them. On the far side of the parking lot, they had a Tesla supercharging center with I think six or eight slots in it. Tesla's already following the same model. They obviously did a deal with Sheetz to put those there right in their parking lot and block off some of those parking spaces. We're already seeing that happen and it makes sense that that will happen. That's why I think it's good as an investor to keep an eye out for the companies that are going to be slotting into existing real estate like that. 

Again, ChargePoint is one of them. Electrify America will be doing similar things, but that's not a company you can directly invest in. We talked about hardware. In terms of hardware, the company is making some of this equipment, you can invest in a lot of them. It's companies like Siemens or Schneider Electric. This isn't rocket science and companies that make large complicated electrical equipment Internet-connected, and there's a lot of companies that do that in the world, they're the ones who are going to be making this stuff. The margins on it are going to be low, and you're buying it as a piece of a conglomerate. It's not going to be much of a slice of Siemens or something. There's ways to invest in this maybe 2% of revenue or something at one of these companies. You're not getting it very directly.

Sciple: It sounds like the story we're telling here when it comes to electric vehicle charging, is that to the extent companies have an advantage here, it's not going to be in technology, because lots of companies can design chargers that can meet the specifications you need. But it's in something like execution or providing a service to your customers where they don't have to worry about managing their system and any of those problems. Is it a servicing advantage that companies will have in this space?

Jayson: I think so and that's where simplicity is going to win. Electrify America has got these horrible ratings right now and it is failing whereas ChargePoint, their app, and the feedback you get there is generally a little higher. I think Tesla is probably the best. The Tesla system, from everything I've seen and heard from people on them, is when you're at home, you plug in, when you go somewhere else, you plug in, it reads what car you are, connects it up to your account, charges you if you need to be charged and there's no fuss no muss. There's a guy who is a YouTube channel I watch frequently because he's a very smart dude, he's an engineer, he's a motorhead, but he drives electric cars now there's a lot of work on those on YouTube. He was talking about he was driving the new Volkswagen, I think it was the ID.3, and how it didn't work so well with Electrify America, which is a sad irony given that Volkswagen is behind both of those systems. But he mentioned he had been driving the new Ford Mustang, was it a Mach-E? All he had to do there was plug it in and it worked very similarly to how he'd been charging a Tesla. 

The simplicity that people expect in the app world these days is a higher level and the winner here may be the one that just causes the fewest headaches. Personally, I think it's hilarious because the complaints you read on some of these systems are bad. It's like, "I had to hold my phone like 10 feet away from the charger because it was reading the GPS wrong and it wouldn't charge my car because it thought I wasn't next to the charger." There's weird stuff like that. But sometimes it's just like, "I can't believe I had to swipe my credit card in order to pay for my electricity." If you're swiping your credit card to buy gas all the time like most people. If you had to swipe your credit card to buy an electric charge for your car, you probably wouldn't think that was such a huge deal. But I think the winners are going to be the ones who make it easiest, and this is where Tesla has an advantage. Does it remain durable forever? Who knows? I think probably not. I tend to think that there are a lot of smart people working on this and they'll fix some of this, but you never know.

Sciple: I think that goes to the idea of this space is still very undeveloped. We haven't decided on what type of plug we're going to use yet or any of those standards. It's still to be determined what brands emerge from here. But the things we're looking for is servicing companies that are honest and not promotional and that are realistic about the opportunity going out into the future. Seth, what kind of final advice would you give for folks who are interested in following this space and maybe investing?

Jayson: As I look through for investable ideas, sad for me to say ChargePoint, which looks super expensive and very risky, looked like my favorite one in this space. That's not a unique opinion among analysts who follow this space, and they're all a lot smarter than I am. Let's take that word for it. Let me not lie that if you had to have the pure-play, that's where you would go. This is going to sound like I'm evading the question, but if I were super high on the EV charging future, that would mean that in turn, I'm high on the EV future and I'd rather put my money in a company like GM or Volkswagen, which I think are reasonably priced and doing some really great things on some really interesting new EVs, and selling tons and tons of them all over the world already. I think once they get their economies of scale moving, and once people start getting interested in having EVs, I think they actually have the most to gain, after having [laughs] tried to keep EVs at arm's length for so long. They finally figured out, "We should get this done right. This will be cheaper, we'll make more money." That's probably where I would look if I were high on the charging part of it because I think the risk is lower and I think the potential returns are higher in the automakers.

Sciple: I tend to agree with you, Seth, I think of super investing in EV charging, I think I will wait. I would wait until I see one or two brands emerge that I think are the brands that are going to be really significant going into the future or I have some idea of what the future is going to look like. I still think the range of outcomes is far too broad for me relative to the price that you have to pay for a lot of these companies today. You have to predict a future that is much less certain now than the prices reflect.

Jayson: The certainties of that future are that they're going to have to pay for the electricity. Go for the utilities that are binding together to create this network. Because guess what? They're going to get paid no matter what. That may be the boring answer, but maybe it's the answers that we need to provide [laughs] because there's a lot of ways to lose your butt right now on this, and other ways to get a piece of the bright future without being too risky.

Sciple: Absolutely. Well, Seth, it's great to have you on Industry Focus, I think for the first time with me, let's have you on again sometime soon.

Jayson: All right.

Sciple: As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show, for Seth Jayson, I'm Nick Sciple. Thanks for listening and Fool on!