With the exponential growth in electric vehicles (EVs), the need for EV charging infrastructure cannot be overemphasized. EV charging companies, including ChargePoint Holdings (CHPT -1.43%), seem to be in the right place at the right time. The company is growing aggressively, and it also has a long growth runway.
So, can ChargePoint Holdings stock generate multibagger returns for you? Let's discuss the company's growth prospects, as well as its risks.
Subscription revenue is key to ChargePoint's growth
In its fiscal fourth quarter, ended Jan. 31, 2022, ChargePoint grew its revenue by a staggering 90% year over year. For the full year, the company's revenue rose 65% over the previous year. What's more, this year, ChargePoint expects to nearly double its revenue from last year.
ChargePoint's strong revenue growth reflects the soaring demand for charging infrastructure. For the full year, the company's networked charging systems revenue, which constitutes hardware revenue from the sale of charging systems, rose 90% year over year. On the other hand, its subscriptions revenue grew 32% year over year. Networked charging systems revenue accounted for 72% of the company's total revenue.
Image source: ChargePoint.
Subscription revenue forms a small fraction of ChargePoint's total revenue, and it is growing at a slower rate than hardware revenue. However, ChargePoint believes that this mix will change over time. In the company's latest earnings call, CEO Pasquale Romano noted that "every commercial and fleet port we sell has attached recurring software subscription revenue, and nearly every customer account represents a significant land-and-expand opportunity."
ChargePoint's success is largely tied to its ability to grow its subscription revenue. Subscription revenue generates significantly higher gross margins than hardware sales. For example, ChargePoint's gross margin on subscription revenue was 42% last year, compared to a gross margin of just 15% on networked charging systems revenue. The idea is to continue growing hardware sales, which will help boost subscription revenue too. The plan makes sense in principle. ChargePoint expects to reach cashflow breakeven in 2024.
The EV charging company has a long growth runway
In 2021, EV sales in the U.S. more than doubled, and in Europe, sales increased by 70%. Both the U.S. and Europe are ChargePoint's focus markets. ChargePoint has over 174,000 network ports, with 51,000 of those in Europe.
Not only are EV sales rising rapidly, but they are also expected to continue growing over the next several years. That's because, despite strong growth, EVs accounted for just 9% of global car sales last year. There is a huge potential market for EVs. Governments worldwide are pushing for the electrification of transport. Several factors, including supportive governmental policies, falling costs of EVs, improving battery technology, and development of charging infrastructure, are driving the transition from internal combustion engines to EVs.
Is ChargePoint a multibagger stock?
As a leading EV charging company, ChargePoint is among the most well-placed to benefit from the ongoing growth in EVs. However, it faces some serious risks. The company isn't profitable yet, and its profitability depends on the success of its growth plan. Moreover, there are still several years before ChargePoint will start generating bottom-line profits. Finally, several new EV charging companies are trying to expand their networks, and ChargePoint faces stiff competition in the space. ChargePoint may find it difficult to differentiate its offerings from competitors. So, its potential for margin expansion could be limited.
ChargePoint stock is trading at a forward price-to-sales ratio of nearly 7, which compares favorably with a ratio of 16 for Blink Charging and 20 for EVgo. In short, if you are looking to invest in an EV charging company, ChargePoint looks like the better bet.
ChargePoint stock looks well-placed to generate market-beating returns. If the company manages to execute its plans, its stock could also prove to be a multibagger in the long run.
