ChargePoint Holdings (CHPT 0.79%) reports its second-quarter fiscal 2024 earnings on Wednesday. Investors that have endured a painful 22% sell-off so far this year are looking for the company to continue its torrid top-line growth rate while also reducing losses and working toward profitability.
Here's what the growth company is doing well and what it can do to help turn its business around.
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Credit where credit is due
What ChargePoint has going for it is incredibly impressive revenue growth and improving gross profit.
CHPT Revenue (TTM) data by YCharts.
The company is guiding for $148 million to $158 million in Q2 fiscal 2024 quarterly revenue. For context, that's slightly more revenue than ChargePoint made in all of fiscal 2021.
What's more, the company's gross profit has dramatically improved thanks to growing subscription revenue, which is higher margin than selling the physical charging stations.
Operating expenses also make up a smaller portion of revenue than in years past.
ChargePoint's revenue growth is due to a rapidly growing network of charging stations. As of its June 2023 investor presentation, ChargePoint now has over 240,000 activated charging ports.
So, from a pure growth perspective, ChargePoint is doing incredibly well.
Where ChargePoint can improve
In 2021 and 2022, unprofitable growth stocks underwent a massive sell-off as investors lost patience with future results and shifted their attention to the short term. ChargePoint was impacted by this broad sell-off. The company's best chance of restoring faith is to sustain a strong revenue growth rate but, more importantly, show that the business can become profitable and stay profitable.
During its first-quarter fiscal 2024 earnings call, ChargePoint reaffirmed its intention to be earnings before interest, taxes, depreciation, and amortization (EBITDA)-positive and operating cash flow-positive by the end of calendar year 2024. However, those goals don't include net income. And ChargePoint has not provided a target of when it expects to have a positive bottom line. The goals are a step in the right direction. But the bigger question is the long-term viability of ChargePoint's business model and if it can prove to be high-margin over time.
ChargePoint makes revenue by selling charging stations to businesses, single or multifamily residents, and fleets. It also makes money on software and subscription services for maintaining those stations. The company's land-and-expand business strategy centers around customer acquisition. The idea is that landing as many customers as possible early will be expensive but will boost subscription revenue over time. The pressure will then shift away from having to sell new charging stations to simply maintaining or upgrading existing stations. Another hope is that ChargePoint will make early inroads with large companies, whether it be a corporate office, residential or commercial real estate developer, etc., that will then turn to ChargePoint for more business as EV adoption grows.
It's a compelling business model, at least in a vacuum. But in the real world, investors are rarely so patient. The problem is that ChargePoint isn't showing meaningful improvement in reaching positive EBITDA or positive operating cash flow.
CHPT EBITDA (TTM) data by YCharts.
Loses are accelerating, partially because ChargePoint is still in ultra-fast growth mode. But it's going to have to slam the brakes if it wants to avoid overpromising and underdelivering. Until ChargePoint can show improvements in reducing its cash burn, it's likely to get an increasingly shorter leash from investors.
Proceed with caution
ChargePoint is an excellent example of a company that can have a dominant position in an exciting industry but still be an underperforming stock because its path to profitability is so far away, and some investors would rather put their money to work into something that has more short-term upside.
Some of the greatest gains in the stock market are made when a stock is out of favor, and expectations are low. ChargePoint isn't quite in that category because, despite the revenue growth, it still has a 4.9 price-to-sales ratio (which isn't that low). But with just a $2.6 billion market cap, ChargePoint is small enough to where it could easily compound and still be a reasonable size compared to the $192 billion market opportunity.
What's more, if ChargePoint does show a clear path to profitability and limiting losses, investors will likely take notice, and the stock could rise quickly. For now, there's a lot of speculation surrounding ChargePoint. And for that reason, investors should only consider the stock if they are comfortable with the risks.
