ChargePoint Holdings (CHPT 0.94%) reached a tipping point on Thursday, falling as much as 29.8% intraday to a new all-time low before making up about half of those losses.
The volatile trading session came in response to the company's second-quarter fiscal 2024 earnings call and results.
Here's why investors have lost patience with the growth stock and where to go from here.
Data source: ChargePoint.
ChargePoint continues to grow sales at a torrid pace
As you can see in the visualized income graphic above, ChargePoint is having no problem growing its top line. Revenue growth came in at $150.5 million for the quarter, which was at the low range of guidance but still a 39% year-over-year growth rate. Full-year revenue guidance is $605 million to $630 million. At the mid-range, the guidance represents 31.9% year-over-year growth. It would imply about $337 million in second-half fiscal 2024 revenue compared to $280.5 million in the first half, which is a more than 20% growth rate in just six months. Dig deeper, however, and ChargePoint is essentially guiding for $179.5 million in Q4 fiscal 2024 revenue based on its Q3 guidance of $150 million to $165 million. So there's no denying the revenue growth is there.
Subscription revenue continues to outpace networked charging-system revenue, which is exactly what investors want to see. ChargePoint breaks down its revenue into two buckets -- subscriptions which are the software and services that come with maintaining a charging station and then selling the physical charging system to a customer, which ChargePoint calls its networked charging-systems category. The idea is that the more charging stations that are installed, the greater the percentage that high-margin subscription revenue will make of total revenue. And so far, that has proven true, as subscription revenue has contributed an increasingly higher percentage of revenue and is key for gross profit. That's the good news.
NYSE: CHPT
Key Data Points
Serious profitability question marks
The bad news is that ChargePoint doesn't have a clear path toward achieving its Q4 calendar year 2024 target of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Losses are mounting at ChargePoint. Net losses widened to $125.3 million for the quarter. And gross margins went to virtually zero due to a $28 million inventory-impairment charge. It's not a recurring charge, so we should see ChargePoint's gross margin improve next quarter. But for a company already walking on thin ice, every unexpected loss cuts especially deep.
ChargePoint exited the quarter with $263.9 million in cash on the balance sheet, which doesn't leave a lot of wiggle room if it is losing over $100 million a quarter.
The company cut 10% of its workforce in an effort to reduce annual operating expenses by around $30 million, which is a step in the right direction toward achieving profitability. But the real strides have to come from higher gross margins.
The math doesn't add up
On the earnings call, Oppenheimer analyst Colin Rusch, who hosted a fireside chat with ChargePoint CEO Pasquale Romano in July, questioned ChargePoint on its path to profitability given the revenue-growth rate. And it may have been the most telling point of the whole earnings call. Rusch pointed to the company's 30% to 35% revenue growth rate and implied it wouldn't be enough on its own to reach the end of calendar year 2024 profitability goals. And he makes a good point.
Ignoring this quarter because of the impairment charge, ChargePoint's gross margins in the last few quarters have been 20% to 25%. ChargePoint's golden ticket to profitability implies revenue-growth rate and margin expansion. Put another way, profitability requires selling more products and services and making more gross profit on each dollar sold.
The problem is that the revenue-growth rate alone won't be nearly enough to get ChargePoint to positive adjusted EBITDA by the end of calendar year 2024. ChargePoint is going to have to cut costs and boost gross margins, by a lot, in a short period of time to hit this goal. And while ChargePoint deserves credit for giving consistently accurate top-line guidance, there's just no reason to believe it can feasibly hit this goal the way things stand today. Not to mention it is facing mounting pressure from Tesla in the direct current (DC) fast-charging space.
In response to Rusch's question, ChargePoint essentially said it has a lot of work to do on the gross-margin front but is confident it will get there. The lack of detail overshadowed the confidence, and the negative sentiment was reflected in the stock price.
The sell-off is justified
ChargePoint is giving investors little to hope for. The electric vehicle (EV) charging space simply hasn't proven to be profitable and doesn't show a path to being profitable. Competition is growing, which will challenge margins during a time when ChargePoint desperately needs them to expand. At this point, investors can't assume ChargePoint will reach next year's profitability goal. And based on the sell-off today, it seems that investors are not taking ChargePoint at its word.
ChargePoint is still an exciting stock worth following. If it can crack the code on the EV charging-business model, it could be an opportunity. But until then, an investment in ChargePoint is based more on the speculation that it will turn things around rather than concrete evidence.
