The fall for electric vehicle charging stocks has been steep over the past year, and I don't think we're done with the sell-off yet. You can see below that ChargePoint Holdings (CHPT -3.49%), Blink Charging (BLNK -2.70%), and EVgo Inc (EVGO -1.45%) are all down over 30% in the past year and still declining.
Some of this decline could be because growth stocks are down overall, but I worry that the problems are much deeper for these companies. Here are the three reasons to worry about them all long-term.
Charging is a money-losing business so far
When a company is in growth mode, it's not surprising for it to be losing money, but in the case of charging the negative numbers are pretty staggering. You can see that operating losses are large and growing for all three of these companies, but the crazy thing is that all three companies are losing more from operations than they're generating in revenue.
CHPT Revenue (Quarterly) data by YCharts
Companies losing money either need to find ways to raise money to fund losses continuously or turn losses into profits, eventually. Some companies get a longer leash to achieve profitability, while others don't get the same patience for one reason or another. I don't see losses becoming profits anytime soon for EV charging companies, and raising funds may not be easy, either.
Pricing power for commodities is low
EV charging companies primarily sell two products: chargers and electricity. Neither is proprietary, which means long-term they will likely have very little pricing power in the market.
Let's start with the charger itself. There are dozens of charger brands whether you're looking at home chargers or a commercial charger. EV plugs are standard -- with Tesla products being the sole exception -- so there aren't significant differences between one charger and the next outside of maybe a smart-home integration or payments system for a commercial charger.
Charging for electricity could be a good business eventually, but today fewer than 2% of vehicles on the road are electric -- meaning even chargers in high-traffic areas have low utilization and therefore low margins. If they didn't, we would likely see better operating income above.
If you want evidence of this dynamic, look no further than General Motors' (GM 0.13%) announcement last year that it would work with six EV charging networks -- including Blink Charging, ChargePoint, and EVgo -- to provide service for its Ultium Charge 360 program. The chargers are all inputs to the platform that GM runs, takes payments on, and integrates with customers' vehicles and accounts. No one charging company gets precedent over the other.
Image source: Getty Images.
Will the funding sources dry up?
When companies are losing money, they need to fund operations through either selling debt or stock. The three companies highlighted above haven't sold debt, which is good because that can increase financial risk. However, they will likely need to sell stock to fund operations.
They would all like stock prices to remain high, because that allows for stock to be used as an acquisition tool or a cash-raising mechanism. But when a stock price falls, a company's financial options become less attractive.
When stock prices are soaring, raising funds can be an upward growth spiral when done right because a company can acquire growth and fund organic growth. But the opposite can be true if a stock is falling because it becomes harder to raise funds from either debt or equity markets (see SunEdison's bankruptcy in 2016).Raising funds may remain possible for a while and many companies use dilutive capital raise to stay in operation, but I worry that if stock prices continue to fall it will be a downward spiral charging companies can't get out of.
Why the worst could be ahead for EV charging stocks
I simply don't see EV charging companies becoming profitable in the near future, and that puts companies in a precarious position if stock prices continue to fall. We've seen growth plans get out ahead of performance in renewable energy in the past with solar, wind, hydrogen, and energy storage stocks crashing at different times over the last decade. EV charging stocks may be next.
