Bullish sentiment surrounding electric-vehicle (EV) stocks has receded in the face of high levels of inflation, rising interest rates, and the potential for a prolonged recession to create a much more challenging operating backdrop for businesses in the space. ChargePoint Holdings (CHPT -5.06%) stands among many companies in the broader industry that have seen dramatic contractions in their valuations, and its share price currently sits down roughly 75% from its high.
Does the big valuation pullback represent a buying opportunity, or is this a case where a potentially promising company in a fledgling industry still has too much downside risk? Read on to see why two Motley Fool contributors have different perspectives on the long-term outlook for ChargePoint Holdings stock.
Image source: ChargePoint.
Bull case: ChargePoint is risky, but there's promise here
Keith Noonan: Beyond the big valuation pullbacks for growth stocks spurred by rising interest rates, it's probably fair to say that ChargePoint will face some outsize challenges in the event of a prolonged recession. Periods of economic downturn can be particularly hard on the auto industry, and unprofitable companies in the EV space may have a especially rough go of things as spending habits shift, purse strings tighten, and raising capital for growth initiatives become more difficult. But the current batch of economic challenges doesn't mean that ChargePoint is down for the count.
To its credit, ChargePoint has continued to grow sales at an impressive clip. The company managed to increase sales 93% year over year in the third quarter, reaching $125.3 million, and it will likely continue to post strong double-digit sales growth even with a more challenging macroeconomic backdrop. Management actually expects sales expansion to pick up sequentially in Q4, guiding for revenue of $165 million, which would represent an 108% increase year over year at the midpoint of its target.
Investors should certainly expect revenue growth to decelerate significantly if 2023 plays host to a significant economic downturn, but it's also possible that the company will emerge from challenging conditions with stronger overall market positioning.
In the high-speed, level-2 charging category, ChargePoint currently commands more than 70% of the North American market. A difficult operating backdrop will likely discourage new entrants into the field, and it may allow the company to continue consolidating its share. The charging specialist made big moves to begin building out its network at a stage when the overall EV market was in a much earlier state, and continued investment through the current batch of headwinds may allow ChargePoint to strengthen its long-term positioning.
ChargePoint is undeniably a high-risk investment. But with its market cap sitting at roughly $3.9 billion and a potentially massive runway for long-term expansion, the beaten-down stock could deliver big wins.
ChargePoint is riding a powerful tailwind, but it may not be enough
Parkev Tatevosian: Admittedly, ChargePoint is rapidly growing revenue and has powerful tailwinds that suggest the momentum could persist. Consumer adoption of EVs is exploding, with people willing to wait weeks, months, and even years to receive a preordered electric vehicle from one of the many car companies ramping up production. Further, governments are putting fuel on this fire by incentivizing the purchases of EVs.
As a result, ChargePoint's revenue has soared from just $35 million in the quarter that ended in July 2020 to $125 million in the quarter that ended in October 2022. However, remarkable growth in sales doesn't necessarily make a good investment. ChargePoint's operating losses have increased from $24 million to $83 million in the same time frame mentioned above. There is hope that, at a large enough scale, the company can turn profitable, but there is no guarantee it will ever reach that level. Indeed, there is little evidence of economies of scale in its gross or operating profit margins.
CHPT PS Ratio data by YCharts
And with ChargePoint's shares selling at an elevated price-to-sales ratio of 9.3, the risk versus reward for investors is not favorable. That could be why the stock was down considerably in 2022. Investors hoping to benefit from the strong tailwinds of the EV revolution are better served looking elsewhere.
Should you buy ChargePoint stock?
For investors with a low-to-medium risk tolerance, ChargePoint probably doesn't have the makings of a complementary portfolio addition. The charging specialist sits squarely in high-risk, high-reward territory, and there are numerous potential factors that could cause the company's share price to fall substantially below current levels or otherwise underperform the market at large.
But for risk-tolerant investors seeking exposure to the EV space, ChargePoint has some appealing characteristics, and big sell-offs have made its stock more appealing as a potential buy-and-hold play. The company has built an early leadership position in a corner of the industry that looks primed for long-term growth, and its status as a pick-and-shovel provider in the overall EV revolution may offer a way to mitigate some of the risks that come with backing individual EV manufacturers.
