Electric vehicle stocks have corrected sharply in the last couple of weeks. The recent correction has brought electric vehicle (EV) stocks' valuations to much saner levels from where they have largely been for more than a year. Stock of EV charging company ChargePoint Holdings (CHPT 3.46%) fell 27% in January. The stock already fell more than 50% in 2021.
Let's discuss where could ChargePoint be 10 years from now, and if the recent fall presents an opportunity to buy the stock.
ChargePoint's focus on subscription revenue
To find the long-term growth prospects for ChargePoint, it is important to first understand how the company operates. The company earns revenue primarily from two sources -- hardware revenue by selling chargers and related equipment, and subscription revenue by selling software services and warranties. ChargePoint's revenue does not depend on the amount of electricity consumed. Instead, it generates revenue mainly from businesses that buy the company's products and services for a fee.
These buyers include commercial customers or offices which, in turn, offer charging as a perk to their employees; universities offering it to students; hospitals offering the service to patients, and so on. ChargePoint's customers also include fleet operators, who buy software systems from ChargePoint, in addition to chargers, to manage their fleet's charging needs.
In the third quarter, revenue from hardware sales accounted for 73% of ChargePoint's total revenue. However, the company expects that over time, recurring revenue should account for as much as half of the total revenue from a typical charging unit. That's because while hardware sales form the major chunk of revenue in the year in which a charger is sold, recurring revenue from software and warranty services form the entire sales for that unit in subsequent years. Over time, this recurring revenue adds up to equal the upfront hardware revenue.
ChargePoint's model looks sound, and the company has been steadily growing its customers over the years.
Can ChargePoint become profitable?
The issue with ChargePoint, like other EV charging companies, is that while its revenue is growing, its losses are also mounting. In the third quarter, ChargePoint generated revenue of $65 million. Its net loss for the quarter stood at a loss of $69 million. While the company's revenue grew 79% year over year, its operating expenses more than doubled over the same time frame. Research and development expenses form the largest portion of ChargePoint's operating expenses.
The company is investing heavily in its software platform and expects the investments to pay off in the coming years. Further, as a new company, it is spending considerably on sales and marketing.
Given the immense expected growth in EVs, ChargePoint is likely to continue growing its revenue fast in the coming years, too. If the company manages to keep its operating expenses in check, as it is hoping, it should become profitable in a few years. It is important to note that ChargePoint expected to achieve earnings before interest, taxes, depreciation, and amortization (EBITDA) -- breakeven in 2024 -- a target that the company provided in late 2020, and which it has neither changed nor reaffirmed lately. So, the company is still years away from generating bottom-line profits.
ChargePoint is well placed for long-term growth
A robust EV charging infrastructure is a key priority of the federal government, which plans to increase the number of public EV chargers in the U.S. to 500,000 by 2030. This focus bodes well for EV charging companies, including ChargePoint.
ChargePoint boasts one of the largest EV charging networks in the world, with 163,000 ports. Of these, roughly 45,000 are in Europe. As a leading operator that's growing fast, ChargePoint could have some edge over its competition. If the company's growth pans out as it is expecting, ChargePoint could continue to be a leading EV charging network in a decade from now. Importantly, the company could already be profitable by then.
Yet, due to ongoing losses, ChargePoint is a long-term growth story suitable only for patient investors with a high appetite for risk.