Billions of dollars are pouring into electric vehicles (EVs) from around the automotive industry, making it the likely long-term future of transportation. Charging station company ChargePoint Holdings (CHPT -2.33%) went public in March 2021, and investors flocked to the stock.
Unfortunately, the early bird didn't make out too well. Had you invested $10,000 in ChargePoint in March 2021, you'd have just $2,881 today to show for it. But it's not like ChargePoint is the only growth stock that has taken a beating. Most growth stocks are well off their highs of 2020 to 2021.
So, is ChargePoint poised to electrify your portfolio from these low prices? Pump the brakes and read this before buying shares.
How ChargePoint makes money
You can think of ChargePoint Holdings as a pick-and-shovel play on electric vehicles. While Tesla has invested for years in building a charging station network, many automotive brands are just getting their feet wet. ChargePoint's building a network that EV drivers can pay to use. The company has more than 225,000 charge points throughout North America and Europe.
ChargePoint's business is similar to the classic razor blade model. The company sells charging stations and sites, then sells subscriptions to the needed software and services to maintain them. The equipment sales are generally low-margin, designed to get customers onboard, and the real profit is in the subscriptions that ideally would become increasingly larger over time.
Networked charging system revenue was $363 million in 2022 at a 12% gross profit margin. On the other hand, subscription revenue was $85 million at a 40% margin. The company's operating losses were $341 million in 2022, which means that subscription revenue must grow significantly to push the overall business toward turning a profit.
Could EV adoption hit a snag?
The investment thesis is that society needs vastly more charging stations to support a broad shift to electric vehicles. The strong demand for charging stations will drive business for ChargePoint, which claims to have seven times more market share than its closest competitor in North America.
Management is leaning on forecasts that electric vehicles will contribute 9.9% of light-duty vehicle sales in the U.S. and Europe by 2025 and 29.2% by 2030. Considering that figure was 2.9% in 2019, that seems like an ambitiously rapid adoption pace.
While many see the automotive industry transitioning to electric vehicles over time, their hefty price tag could slow adoption. EVs are widely unaffordable for the average buyer. An electric vehicle costs around $58,000, on average, which is 26% more than what the average vehicle sells for in the U.S. Heck, Ford's F150 Lightning launched at a starting price of nearly $40,000, but it swelled to $56,000 in just a couple of years.
Many legacy automakers getting into EVs are starting upstream in the market, leaving a lack of options for the average person who wants affordable electric transportation. That should change as more models hit the market, but this all takes time, and that's not ideal for ChargePoint Holdings.
The road to profitability is long and difficult
People have time to wait out electric vehicles, letting technological advancements decrease costs. But ChargePoint Holdings is losing money, something it can't afford to do forever. The company's operating losses were a whopping $341 million in 2022, a 28% increase from 2021 despite generating twice as much revenue.
ChargePoint's problem is that its charging systems contribute little to the bottom line. That's by design, of course, but investors need to see subscription revenue pick up steam. The company turned $363 million into $86 million in gross profit. How much will it need to cover operating expenses? Given that its losses increased in 2022, it could take a while.
CHPT Cash and Short Term Investments (Quarterly) data by YCharts
There's $74 million in net cash (total cash minus debt) on the books, which means debt or a dilutive equity raise might be needed soon. Remember that new shares decrease the value of existing shares. In other words, things could get worse for shareholders before getting better. Consider avoiding the stock until there's at least a clear path to positive cash flow. ChargePoint Holdings isn't there yet.
