There has been a lot of interest in electric-vehicle (EV) charging stocks lately. Given the strong growth in EVs, the interest in charging-infrastructure companies is logical. President Joe Biden has set an ambitious target: Half of all new vehicle sales in 2030 will be electric. The bipartisan infrastructure bill provides for a $7.5 billion investment in EV charging infrastructure over five years.
There are currently more than 45,000 EV charging stations with more than 111,000 charging ports in the U.S. Still, the country lags China and Europe in terms of EVs and charging infrastructure. In all, the backdrop looks just perfect for the growth of the country's EV charging infrastructure in the coming years. The key question is, will this growth translate into profits for ChargePoint Holdings (CHPT 7.61%)? Let's discuss that next.
The largest charging network
ChargePoint has the largest network of EV chargers in the U.S. It has more than 26,000 public charging station locations with more than 47,000 ports in the country. Nearly 1,600 of these station locations have DC fast chargers. Globally, the company has more than 118,000 ChargePoint ports.
By comparison, Blink Charging (BLNK 3.14%) has a network of just 1,390 stations with around 3,300 ports. EVgo (EVGO 5.38%) and Volta (VLTA -0.30%) each have less than a thousand station locations. Tesla has more than 22,800 ports at more than 5,600 stations. So ChargePoint is clearly the leading EV charging company in the U.S. right now.
Recurring revenue stream
ChargePoint earns revenue from hardware sales, annual subscriptions for its software, and services. Its hardware sales generate upfront revenue. On the other hand, its software-as-a-service (SaaS) model generates recurring revenue with a 100% attach rate to the hardware. The company generates service revenue through services like parts and labor warranties.
In the first half of 2021, ChargePoint generated 70% of its revenue from hardware sales, mainly level 2 AC chargers. As EV penetration increases, the demand for charging infrastructure will increase. So the company has a growing addressable market. Moreover, with increased hardware sales, the company's subscription and service revenue will also continue to grow.
On a per-unit basis, though, hardware revenue forms a major chunk of the revenue in the year in which the unit is sold, while recurring-service revenue keeps coming over the next several years. ChargePoint estimates that, over time, the total recurring revenue from a typical unit increases to become equal to the hardware revenue from that unit. Overall, ChargePoint's growth model looks solid.
Strong customer base
ChargePoint targets three different customer segments. Its commercial customers include workplaces and commercial properties, universities, hospitals, retail stores, etc. Fueling and convenience companies, and parking providers also buy ChargePoint's chargers. These customers usually provide an EV charging facility as a perk to employees, students, patients, retail customers, etc.
And over time, they typically expand the services they buy from ChargePoint. The cumulative quarterly billings from ChargePoint's top 25 customers increased 14 times from the first quarter of the company's fiscal year (FY) 2017 to the fourth quarter of FY 2021. This growth reflects both software and warranty subscriptions as well as increased hardware purchases.
ChargePoint's second category of customers are fleet customers, such as logistics companies and shared mobility providers. Its remaining customer segment is residential, including single and multifamily residences.
Should you buy this EV charging stock?
Though ChargePoint's business looks interesting, it poses some noteworthy risks. It faces competition from several other EV charging companies as well as EV makers developing their own charging infrastructure. With very little differentiation in the offerings, EV charging companies may have limited pricing power. ChargePoint is not yet profitable, and it may have thin margins even when it does become profitable. Considering these factors, the stock's price-to-sales ratio of more than 40 looks high.
In the long run, if ChargePoint's sales grow substantially, this could justify the stock's high valuation. The EV charging market is still evolving, but as a leading player, ChargePoint could well be a part of this growth. All in all, the stock could be an interesting bet but is suitable only for investors with a high threshold for volatility.