Artificial intelligence euphoria has taken the market by storm. Investor optimism is high, and valuations are going up. Glancing at the stock market now, you may think that growth stocks have run their course. But there are industries in the stock market that have largely missed out on the market's epic 2023 rally.
One such industry is electric vehicle (EV) charging. And ChargePoint Holdings (CHPT 5.51%) looks like a hidden gem growth stock that is out of favor but could be worth owning for years to come.
Image source: Getty Images.
The elephant in the room
The EV charging space has been in the spotlight for a number of reasons. The first is that Tesla (TSLA 14.65%) has opened up its charging network, allowing legacy automakers like General Motors (GM 0.08%) and newer EV makers like Rivian Automotive (RIVN 2.38%) to use its coveted Supercharger infrastructure. Although Tesla owners lose the perk of having exclusive access to the network, Tesla stands to benefit from monetizing over 45,000 Superchargers. The second piece of news is that EV charging companies like ChargePoint are adopting the North American Charging Standard for connector points, which is used by Tesla. These two pieces of news have sent shockwaves through the EV charger industry and put pressure on companies like ChargePoint.
At the end of the day, these charging companies are in a commodity business. They don't sell electricity like a gas station sells gasoline, but rather, they make money from the charging stations themselves through partnerships with commercial, fleet, and residential customers. Fears that Tesla will wipe out these smaller, pure-play charging companies are high. And there are some major risks to ChargePoint's business worth being aware of, namely its cash burn and debt position.
ChargePoint's grand plan
The big difference between ChargePoint and Tesla is that the vast majority of ChargePoint's solutions are Level 2 alternating current (AC) chargers, whereas Tesla and its Supercharger network specialize in direct current (DC) fast charging. The ChargePoint kind of charger is what you have likely seen at grocery stores, parking garages, shopping areas, parks, etc., whereas Tesla superchargers are ideal for road trips or a time crunch. In other words, DC chargers are an active solution, and Level 2 chargers are a passive charging experience where charging isn't the focus.
To ChargePoint's credit, the company has been consistent with its messaging ever since going public a few years back. The objective is a "land and expand" model, which focuses on building a network of charging stations and partnering with as many customers as possible. Building this infrastructure and partnership early allows ChargePoint to benefit from a sustained increase in EV adoption over the next several decades. It would be far more profitable in the short term for the company not to reinvest its cash flows back into the business and build new chargers. But that isn't the strategy for ChargePoint, and it never has been.
Understanding ChargePoint's dogged pursuit of its aggressive strategy is an essential baseline that investors have to come to terms with before considering the stock. There is very little short-term upside for ChargePoint in terms of its real results. However, if ChargePoint is correct about its forecasts, then it stands to be the best-positioned pure-play charging company. Again, there's a lot of uncertainty and risk with this stock. And for that reason, it's one that some investors may not even want to consider. If you fall into the brave camp of investors that are considering ChargePoint, it's important to weight the stock's percentage of your portfolio in accordance with your risk tolerance.
ChargePoint is succeeding where it counts
According to ChargePoint's June 2023 investor presentation, the company has over 240,000 activated charging ports, over 20,000 of which are DC ports. It also has over half of a million ports through roaming reach, which are ports that ChargePoint doesn't own but that it partners with. If we go back and look at its June 2022 investor presentation, ChargePpint said it had 188,000 activated ports at the time, including 12,000 DC ports and 320,000 roaming ports. Going back even further to its September 2021 investor presentation, which showed data as of July 31, 2021, ChargePoint had just 118,000 activated ports, 3,700 DC ports, and 200,000 ports through roaming integrations.
Granted, ChargePoint made some acquisitions over the last three years that boosted its port figures. But still, the company has essentially more than doubled its charging port portfolio in less than three years and sports nearly half as many DC ports as Tesla's global Supercharger network. That's a remarkable achievement for the company and a testament to the breakneck growth rate that management is keen on sustaining.
A simple yet compelling investment thesis
ChargePoint is hovering around an all-time low and has a market cap of just $3.1 billion. Its size is small enough that it could easily double or better from here over the next few years in lockstep with a growing EV industry. However, ChargePoint will eventually need to chart a path to profitability and positive cash flow, or else its land-and-expand model is doomed to fail.
ChargePoint has its risks. But the company also has the intangible side of the investment thesis in spades. Intangibles aren't the financial metrics themselves but rather attributes such as management's communication. Or the company's transparency when it comes to presentations and investor updates.
If you follow ChargePoint closely, you get a sense that the company cares about its investors and is conveying information clearly and consistently so that you always feel in the loop, even if the stock price is struggling. Having strong intangibles makes it much easier to stick with a company through tough times.
Add it all up, and ChargePoint stands out as a high-risk but potentially high-reward growth stock worth looking at now.
