The market sell-off has crushed the valuations of many stocks, particularly growth companies that depend on future revenues and cash flows.
ChargePoint Holdings (CHPT -1.43%), one of the leading electric vehicle (EV) charging infrastructure companies, went public about a year and a half ago. The stock is now down 67% from its all-time high, despite reporting better than expected fiscal 2022 results and guidance for a monster fiscal 2023. ChargePoint's fiscal 2023 is the 12-month period from Feb. 1, 2022, to Jan. 31, 2023.
With a market cap of around $5 billion, I think there's an argument that ChargePoint could reach a market cap of $50 billion over the next 10 to 15 years. But it could also fail and result in a catastrophic loss for investors who put too much faith in the stock. Here's why ChargePoint is a potential 10-bagger worth considering now.
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A young industry with a lot of upside
ChargePoint makes money by selling hardware to businesses, fleets, and residential customers and generating revenue from those charging ports once they are activated. Businesses may install ChargePoint ports as a perk for their employees or to attract customers. Apartment complexes and condos may install ports for their tenants. Homeowners may want a port in their garage. And fleets may want to install a network of charging stations to support their operations.
ChargePoint estimates that its market penetration will grow along with EV adoption. According to a 2021 report by the International Energy Agency, global EV sales were 6.6 million in 2021, representing just under 9% of total car market sales compared to 2.5% in 2019. During the company's March 2, 2022, earnings call, ChargePoint CEO Pasquale Romano said the following regarding market opportunity:
I tell folks here all the time, we're plus or minus at 1% penetration, depending on whether you're talking about North America or Europe into the fleet of vehicles out there, less so for fleets; for consumer passenger cars, plus or minus 1% or so. So a company like this can turn in these results at that level. For how early we are in penetration, we have enormous -- absolutely enormous expectations for what this looks like in just a very few years.
ChargePoint posted revenue of $242 million in fiscal 2022 compared to estimates of $235 million to $240 million. At the beginning of fiscal 2022, ChargePoint expected to earn only $195 million to $205 million in fiscal 2022 revenue but kept raising its guidance. It earned $146.5 million in fiscal 2021 revenue.
In fiscal 2023, it is guiding for $450 million to $500 million in revenue, representing nearly double last year's revenue and triple the revenue it earned two years ago.
Land and expand
ChargePoint's torrid growth rate is due to aggressive spending in Europe and North America, both through acquisitions and organic growth. The company's "land and expand" strategy is centered around growing market share faster than the competition and creating a large enough network of stations that customers choose ChargePoint for all their charging needs.
The company's highest-margin business comes from its commercial customers. ChargePoint grew its commercial business by 89% in fiscal 2022. Over 50% of Fortune 500 companies are now ChargePoint customers.
Over time, ChargePoint expects its operating costs to come down and margins to go up. For example, in fiscal 2022, it earned $242 million in revenue but spent $240 million on operating expenses. But in fiscal 2023, it expects non-GAAP operating expenses to be between $350 million and $370 million off of $450 million to $500 million in revenue, presenting a lower percentage of revenue than in fiscal 2022. In calendar year 2024, which is essentially fiscal 2025, ChargePoint expects to achieve operating cash flow breakeven followed by profitability in future years.
The big picture
ChargePoint expects to incur higher costs due to supply chain challenges in fiscal 2023 as it asks its suppliers, essentially, to double their shipments to support ChargePoint's growth. It's a tall order that will certainly damage ChargePoint's gross margin and contribute to higher short-term costs. However, long-term investors may consider adding ChargePoint to a diversified basket of EV stocks. The company reiterated its intent to invest heavily in growing market share, trusting that installed ports will generate repeat business in the coming years.
ChargePoint's aggressive strategy leaves the company more vulnerable to short-term risks. So despite its potential, this growth stock is probably a poor fit for risk-averse investors.
